KUALA LUMPUR, Oct 23 – Prime Minister Datuk Seri Najib Tun Razak today unveiled his maiden budget, promising to slash the 2010 deficit from its highest level in more than 20 years, although he provided few clues as to how the cuts would be realised.
Najib, who is also finance minister, told parliament the budget deficit would fall to 5.6 per cent of gross domestic product in 2010 from a forecast 7.4 per cent this year in a move that is seen boosting domestic bonds as issuance slows.
The main spending cuts came from reduced “operating expenditure”, lower food and fuel subsidies, a sensitive political issue for an unpopular government, and less money for development spending.
Najib became premier in April to try to rescue the fortunes of the Barisan Nasional government that in 2008 stumbled to its worst ever losses in over 50 years of rule in national and state elections and alongside promises to privatise state companies, his budget also showed political pressures.
It allocated 11 per cent more money for state workers’ salaries in 2010, nearly one million people accounting for almost 10 per cent of voters and a mainstay of government support.
“The most controversial issue is likely to be the government’s method of achieving the target without significant cuts in government headcount or salaries,” said David Kiu, an analyst with Eurasia Group, a political risk consultancy.
Economists warned that while the targets appeared ambitious, Malaysia’s recent history of budget overshoots since 2007, during the global economic boom in which the country benefitted from high oil and commodities prices, meant delivery on the promised cuts would be watched closely.
The main spending cuts come from:
– reduced operating expenditure, seen down by 13.7 per cent in 2010 at RM138.3 billion;
– lower development spending, seen down 4.5 per cent to RM50.6 billion;
– Further reductions in food and fuel subsidies which are seen falling 14.7 per cent in 2010 to RM20.9 billion.
“It is good that we see now the government seems serious to address the budget deficit issue,” said Azrul Anwar Ahmad Tajudin, senior economist at Bank Islam. “But the problem is whether we can achieve it or not. It’s too huge a reduction.”
The budget plans, obtained by Reuters on Thursday, drew a mixed reaction from credit ratings agencies, although they boosted both the ringgit currency and Malaysian bonds.
The ringgit gained 0.6 per cent to 3.38 per dollar while the yield on the 3-yr debt fell 1 basis point (bps) to 2.90 per cent and the 5-yr yield dropped 3 bps to 3.83 per cent.
“Overall, it’s positive for bonds. Gross issues are going to be much smaller next year than this year because of the smaller deficit,” said Matt Hildebrandt, an economist at JPMorgan.
While Moody’s Investors Service said it had a “strong degree of confidence” in the government’s ability to deliver on its budget promises, rival Fitch said that the planned deficit would merely “stem the deterioration” seen in recent years.
“We would be looking at how the fiscal adjustments will be taking place and whether the measures are one-off or not,” said Fitch credit analyst Ai Ling Ngiam.
While Malaysia’s banks have remained strong during the economic crisis that brought many of the world’s giants to their knees, its export dependent economy has been hit hard.
The government forecasts that exports in Asia’s third most trade dependent economy will fall 20 per cent this year and grow by just 5.3 per cent in 2010.
That means the economy will grow by just 2-3 per cent in 2010 after an expected contraction of 3 per cent this year, a far cry from the 6 per cent growth that Najib wants to achieve.
The government has tried to boost domestic demand with extra spending and loan guarantees worth 67 billion ringgit spread over 2009 and 2010.
Najib said recently that additional government spending was running at RM1 billion a month. – Reuters
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