Malaysia’s Budget Woes

ARCHIVES 2013

By admin-s On Oct 23, 2013

(The Diplomat) – Government expenditure is the highest among the five biggest Southeast Asian economies, accounting for nearly 27 percent of GDP, while Malaysia also has the highest civil servant to population ratio in the region.

An Asian government facing persistent budget deficits is under pressure from financial markets to introduce a consumption tax, despite popular and internal party opposition. Sound familiar? This time though, it is Malaysia and not Japan whose leader is in the firing line ahead of its 2014 budget announcement on Friday.

ANZ economist Weiwen Ng did not mince words when describing the challenge facing the Malaysian government in an October 22 research note, which was headlined “Bitting the fiscal consolidation bullet.”

“Given international capital’s aversion to ‘deficits’ and Malaysia’s multi-year structural fiscal deficit, we would prefer to see Malaysia err on the side of fiscal prudence rather than growth…Malaysia’s fiscal deficit is still woeful – multi-year structural deficit (for 15 consecutive years) and not enough has been done to narrow the structural deficit,” Ng said.

“Tax reforms such as the introduction of GST [goods and services tax] is never popular but is a necessary evil that has been long overdue for Malaysia,” he added.

According to Bloomberg News, the Malaysian ringgit has shown the biggest gains this month among 24 emerging market currencies on speculation that Malaysian Prime Minister Najib Razak will honor promises to curb the budget gap by enacting politically unpopular tax hikes.

Fitch Ratings cut Malaysia’s credit outlook to negative in July, citing increasing debt levels and a lack of fiscal reform. After responding with a cut to fuel subsidies, Najib, who also serves as finance minister, faces the threat of further downgrades and potential spikes in government bond yields should his budget disappoint.