Malaysia to Boost Spending, Help Poor in Pre-Election Budget

Businessweek Available at: http://www.businessweek.com/news/2011-10-07/malaysia-to-boost-spending-help-poor-in-pre-election-budget.html

Oct. 7 (Bloomberg) — Malaysian Prime Minister Najib Razak pledged to boost help for the poor to cushion the impact of inflation and said the government will proceed with rail and housing projects to spur growth as the global economy slows.

Najib, also finance minister, may table a 2012 budget plan for government spending of 230.8 billion ringgit ($73 billion), 0.5 percent larger than this year’s outlay, according to the Ministry of Finance’s 2011/2012 economic report today. Gross domestic product may expand 5 percent to 6 percent next year after growing as much as 5.5 percent in 2011. The budget deficit is forecast to narrow to 4.7 percent of GDP from 5.4 percent.

The prime minister plans to transform the Southeast Asian nation’s economy by improving efficiency, spurring investment and cutting a budget deficit that counts as one of the largest in Asia as a proportion of GDP. Najib has also promised to roll back laws that allow the government to detain citizens without trial, described by critics as draconian, as he seeks to bolster support before elections that must be called by early 2013.

“Amid a challenging external environment, coupled with inflationary pressures, there is added pressure on fiscal resources to ensure that the domestic economy remains resilient and generates higher growth,” the government said. “The 2012 budget will reinforce efforts to boost the competitiveness of the economy through the timely realization of reform initiatives while promoting inclusive and sustainable growth.”

‘Transformation Agenda’

Malaysia has eased barriers to foreign investment since 2009, when the global recession hurt exports of the country’s semiconductors and palm oil. Foreign direct investment rose 75.4 percent in the first six months of 2011 after growing six-fold to 29 billion ringgit last year, the fastest in Asia, the government said in the report.

“The transformation agenda that we have embarked on will energize and return the private sector to its role as the engine of economic growth,” Najib, 58, said in the report. “The private sector must commit to their investment and spearhead growth.”

Europe’s sovereign-debt crisis and the threat of a U.S. recession have roiled global stock markets, erasing almost $10 trillion from equities last quarter. The benchmark FTSE Bursa Malaysia KLCI Index has dropped more than 7 percent this year, while the ringgit has declined 3 percent. The currency traded at 3.156 per dollar as of 3:46 p.m. today.

“The challenges to the Malaysian economy have increased since the second quarter of 2011,” Najib said. “These include slower global growth due to the fiscal problems of the U.S. and European countries, volatile international financial markets and elevated commodity prices.”

Economic Growth

Malaysia’s economic expansion will be 5 percent to 5.5 percent this year, the government said today, lower than an earlier target of as much as 6 percent growth in 2011. The economy grew at the slowest pace since 2009 in the second quarter, climbing 4 percent from a year earlier.

“The growth momentum is expected to pick up in the second half of the year on the back of resilient private consumption and strong private investment,” the government said. “For 2012, GDP growth in Malaysia will remain largely domestic driven, due to heightened uncertainties in the global economy.”

Construction on the first phase of Malaysia’s biggest infrastructure project, a mass rail network, will begin next month, the government said today. The building of a 100-storey tower, a new financial district and a township covering an area of 1,060 hectares will commence in 2012.

Government Expenditure

Total government expenditure in 2011 may reach 229.6 billion ringgit, according to the ministry. State revenue may rise 1.9 percent in 2012 to 186.9 billion ringgit amid higher contributions from corporate and personal taxes and income from petroleum, the report showed.

The spending and revenue estimates in the economic report may change after Najib delivers his budget speech, which may include additional tax and other measures.

Najib has tried to cut operational expenses, including trimming subsidies for sugar, gasoline, diesel and liquefied petroleum gas. The government will maintain the subsidy program to ease the impact of rising prices on its citizens and implement it in a more targeted way, it said today.

Subsidies paid by the state to keep prices of fuel and other essential goods and services low will “remain stable” at 33.2 billion ringgit in 2012 from 32.8 billion in 2011, the ministry said.

“The government recognizes the burden of subsidy outlay on the country’s fiscal position and the need to strengthen it,” it said in the report. “However, any subsidy rationalization will be gradual and the government will ensure that the poor and low-income group will continue to receive government support.”

Accommodative Policy

Malaysia’s monetary policy remains accommodative and supportive of growth, the finance ministry said today.

Inflation has probably peaked and price pressures may ease as the global economy deteriorates, central bank Governor Zeti Akhtar Aziz said Sept. 25.

Bank Negara Malaysia kept borrowing costs unchanged at 3 percent for a second straight meeting in September after four increases from early March 2010 to May this year.

“Domestic inflation is increasingly affected by external factors, including supply constraints,” the government said. “Under such circumstances, sustaining a low inflation environment domestically is more challenging than in the past.”

Regards
ZULKIFLI HASAN