Najib May Extend Handouts as Malaysia Vote Nears

ARCHIVES 2012

By admin-s On Sep 26, 2012

(Bloomberg) – “This will likely be another populist budget and the last spending spree before elections are called,” said Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore, who has covered Malaysia for more than a decade. “Measures to seriously tackle the fiscal deficit and rising public debt will likely be absent. Fiscal reforms will have to come next year, after the general election.”

Malaysian Prime Minister Najib Razak’s efforts to build support ahead of national elections may spur more handouts to the poor and bonuses for civil servants, limiting progress in reducing the 2013 budget deficit.

The country will probably post a shortfall of 4.3 percent of gross domestic product for next year, according to the median estimate of eight economists in a Bloomberg News survey before Najib presents spending plans on Sept. 28. The deficit would exceed 4 percent for a sixth year after a 4.7 percent gap projected by the government for 2012.

Standard & Poor’s and Fitch Ratings have recommended tighter public finances after Najib, 59, raised state salaries, handed cash to low-income households and unveiled rail and road projects to spur growth. The ruling coalition won re-election in 2008 by the smallest margin since 1957, and its five-decade grip on power will again be tested in a vote due by early 2013.

“This will likely be another populist budget and the last spending spree before elections are called,” said Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore, who has covered Malaysia for more than a decade. “Measures to seriously tackle the fiscal deficit and rising public debt will likely be absent. Fiscal reforms will have to come next year, after the general election.”

While the benchmark FTSE Bursa Malaysia KLCI Index has fallen about 2 percent from its record close on Sept. 4, retailers such as Aeon Co. (M) Bhd. and Padini Holdings Bhd. may benefit from measures to boost incomes, according to Maybank Investment Bank Bhd.

Record Budget

Malaysia’s 2013 budget will be 259 billion ringgit ($84 billion), bigger than last year’s record 232.8 billion ringgit, Citigroup Inc. estimates. The government, which joins counterparts from Thailand to the Philippines in increasing spending to protect their economies from the European debt crisis and a faltering U.S. recovery, proposed in June to expand the 2012 annual allocation by 13.4 billion ringgit.

The spending boost has helped support Southeast Asia’s third-largest economy even as the global recovery faltered, with expansion accelerating to 5.4 percent last quarter as construction and consumption climbed. Stronger domestic demand, particularly investment spending, is helping lift tax revenue and prevent the fiscal deficit from worsening, Chua said.

Low Cost

“Spending can be front-loaded, to coincide with elections, without harming the structural fiscal position,” said Aninda Mitra, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “The Malaysian government’s low cost access to local-currency finance, its net external creditor status and recent reforms of its public-sector enterprises provide a cushion against near-term fiscal risks.”

Over the “medium-term,” the rating implications of the drawdown of the current-account surplus amid “a continuing absence of structural fiscal reforms” remain a concern, he said.

The cost to protect Malaysia’s sovereign debt from non- payment has more than halved since last year’s budget. Five-year credit default swaps fell to 91 from 213 on Oct. 3, 2011, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Najib may announce this week measures to make housing more affordable and highlight large construction projects underway, according to Citigroup. He may also repeat a one-off cash handout of 500 ringgit to low-income families, a measure from the 2012 budget, and give a half-month bonus for civil servants, said Lee Heng Guie, chief economist at CIMB Investment Bank.

The prime minister will probably delay implementing a goods and services tax next year, United Overseas Bank Ltd. said.

Political Bang

“Expenditure will likely be reallocated to groups that deliver the best political bang for the buck,” said Kit Wei Zheng, a Singapore-based economist at Citigroup. “With the threat of credit rating downgrades, unless progress is made on fiscal consolidation, the budget will have to walk a tight-rope between populism and fiscal prudence.”