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Friday, October 3, 2014

Najib seen under pressure to make unpopular budget cuts

Malaysia will unveil a 2015 budget next Friday that investors hope will reduce a fuel subsidy bill that is exacerbating the country's worryingly high debt levels.
Whereas Malaysia's economic growth, which clocked 6.3% in the first half, looks impressive, Prime Minister Datuk Seri Najib Razak (pic) has to address concerns over the debt burden and an over-reliance on commodity and energy exports.
Government debt stands close to a self-imposed ceiling of 55% of gross domestic product (GDP), and household debt at 86.8% of GDP is the second highest in Asia.
Moody's Investors Service raised its outlook on Malaysia's A3 sovereign debt rating to positive following Najib's last budget, when he announced unpopular measures, including a new 6% consumption tax that will take effect in April next year, and cuts to food and fuel subsidies.
But economists say he needs to do more.
"What we're looking for is sustainability, not just for the remainder of this administration but also the next administration," said Christian de Guzman, a Singapore-based analyst for Moody's.
A cut in corporate taxes from 25% to 24%, or 20% to 19% for small businesses, is scheduled for 2016, but some analysts suggest the government could either bring it forward or cut more in order to put momentum in private sector investment.
Najib's government currently plans to bring the fiscal deficit down to 3.5% of GDP by the end of this year from 3.9% in 2013, and cut it further to 3.0% by the end of 2015, but there are political complications.
Even though the next election is not due until late 2018, the ruling Barisan Nasional, led by Najib's Umno, is worried that support has ebbed from the ethnic Malay majority.
The coalition is dependent on Malays and ethnic groups in Sabah and Sarawak for votes, and has shored up support through subsidies and cash handouts.
Subsidies totalling RM38.1 billion accounted for 15% of government spending this year, with fuel subsidies alone making up 8%, or RM21 billion.
Having cut the total subsidy bill by 18.4% this year, Najib is expected to cut it further next year by radically reforming fuel subsidies, so they are no longer available to everyone who visits the filling station, but are targeted to benefit the less well off.
Malaysian media reports say the scheme could work through using identification cards at gas stations or via application for subsidised fuel in post offices.
Administered prices for diesel and a cheaper grade of gasoline were increased by up to 10% on Thursday, in a move that will save the government RM1.3 billion this year.
Najib also is expected to announce the full list of items exempted from the new goods and services tax (GST).
The government has forecast the GST would bring in RM2.5 billion in revenue in 2015, which analysts reckon would equate to just over 1% of total revenues.
The government may implement a GST on fuel, a risky move given growing anxiety among voters over rising living costs in a country where 80% of households earn less than RM3,000 a month. A longer list of exemptions could help dampen the rising costs of essential products.
"The pressure is on Najib to show that he can mitigate the impact of the GST," said Serdang MP Ong Kian Ming, adding, "The Umno core is worried that the rural poor would be hit".
The prime minister wrote in his blog in August that the government recognised people were feeling "the pressure from rising costs".
"One of the government's key objectives is to manage the cost of living and keep inflation low," he wrote.
Economists are expecting the GST and fuel price hike to push inflation up to 4% next year, having reached 3.3% in August, accelerating from 1.9% a year earlier. – Reuters

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