Malaysian Government Aims to Halve Deficit as Najib Unveils Five-Year Plan

Malaysia aims to almost halve its budget deficit in the next five years as the government cuts subsidies, widens the tax base and reduces expenses under a plan to make the economy more competitive. The ringgit rose.

“We can no longer rely on past strategies and approaches that had previously driven our economic growth,” Prime Minister Najib Razak said in today’s 10th Malaysia Plan report. “Failure to transform the economy puts the nation at risk of relative decline, as many developing nations are fast catching up.”

The country plans to cut the budget shortfall to 2.8 percent of gross domestic product in 2015 from a revised estimate of 5.3 percent this year, according to the five-year plan unveiled by Najib in Kuala Lumpur today. It earlier projected a 5.6 percent deficit for 2010. The reduction will come even as the federal government plans 230 billion ringgit ($70 billion) of development spending for 2011-15.

Narrowing the budget gap would help Malaysia, which sold debt overseas in May for the first time in eight years, avert the confidence crisis that has engulfed Europe as nations from Greece to Portugal struggle to contain deficits. As the economy rebounds from last year’s recession, Najib has announced plans to trim state subsidies for consumers and roll back policies favoring the country’s biggest ethnic group.

“It’s an ambitious plan and it should be good for the country and its ratings,” said Jason Chong, who helps manage 2.5 billion ringgit of assets as chief investment officer at Manulife Asset Management (Malaysia) Sdn. in Kuala Lumpur. Still, “the key is its implementation,” he said.

Ballooning Deficit

The ringgit advanced from near a two-week low, reversing losses after the five-year plan was released. The currency strengthened 0.3 percent to 3.3065 per dollar as of 3:23 p.m. in Kuala Lumpur, according to data compiled by Bloomberg. It earlier fell as much as 0.3 percent.

The nation’s deficit ballooned to a 22-year high of 7 percent of GDP last year as the government unveiled 67 billion ringgit of stimulus measures under two packages in 2008 and 2009 to help resuscitate growth during the global slump. That’s bigger than the Philippines’ 3.9 percent and compares with 13.6 percent for Greece, 11.2 percent for Spain and 9.4 percent for Portugal.

Malaysia last month sold a $1.25 billion global Islamic bond, which was assigned ratings of A- by Standard & Poor’s and A3 from Moody’s Investors Service, their fourth-lowest investment grades. The country’s debt rating is the highest in Southeast Asia after Singapore.

Growth Accelerates

Southeast Asia’s third-largest economy expanded 10.1 percent last quarter, the most in a decade, allowing Malaysia to join the Group of 20 in shifting focus to deficit reduction. In a statement released after their talks ended June 5, G-20 officials replaced an endorsement of budget stimulus with a pledge to pursue “credible, growth-friendly measures to deliver fiscal sustainability.”

Malaysia needs to achieve average annual growth of 6 percent during the next five years if it is to meet its target of becoming a high-income nation by 2020, today’s report showed. The economy grew an average 5.8 percent from 1991 to 2010.

Growth momentum has slowed over the last decade due to “lackluster” private investment, which has fallen to an average of about 10 percent of GDP from close to 25 percent in the 1990s, the government said in the report.

Brain Drain

To spur growth, the government will promote higher value and knowledge-intensive industries, focusing on skills development, venture-capital funding and innovation, and providing incentives for research and development, Najib said in the report.

The plans include a Talent Corporation to help reverse a brain drain, a 20 billion-ringgit Facilitation Fund to spur investment on a public-private risk-sharing basis, a review of Malaysia’s bankruptcy law to give entrepreneurs a second chance and ensure more efficient processing of insolvency, and a new Competition Law.

There will also be competitive bidding for future toll- roads and power plants, the government said, and a shift from building and operating public services toward buying them from the private sector.

Najib reiterated a pledge to make state assistance for the ethnic-Malay majority and other indigenous people more merit- based, and to sell stakes in more state-owned companies. Help for the so-called bumiputeras, which means sons of the land, “will need to be market-friendly, merit-based, transparent and needs-based,” according to the five-year plan.

Affirmative Action

Under a New Economic Model for Malaysia outlined in March, Najib had said the country will revise its affirmative action policies to target the nation’s poorest across all ethnic groups, moving away from 39-year-old race-based measures that the government now says may impede growth.

Implementing the changes won’t be easy. Already, Najib has had to delay a revamp of the country’s fuel subsidy system, which keeps gasoline and diesel prices below market rates for all Malaysian consumers. His government is also still mulling how to introduce a goods and services tax, scheduled for after 2011 according to Second Finance Minister Ahmad Husni Hanadzlah.

Malaysia will maintain its target of achieving 30 percent corporate equity ownership at macro level for the country’s bumiputeras, Najib said in parliament today. The government will establish a real estate investment trust to help them invest in commercial and industrial properties, he said.

Subsidy Cost

The country spends about 73 billion ringgit a year on subsidies on essential items ranging from fuel to flour, Najib said in April, calling the amount “not sustainable.” This represents a fiscal burden to the government equivalent to 4.7 percent of GDP, or about 12,900 ringgit per household each year, according to today’s report. Subsidies and price controls will be “gradually” rationalized to reflect market prices, according to today’s report.

Najib forecasts a 49 percent increase in state revenue over the next five years, to 183.1 billion ringgit in 2015. That would help cap the budget deficit even as the government boosts development spending by 23 percent to 142.4 billion ringgit in 2015, with investments in roads, ports and railways.

The government has identified 52 high-impact projects worth 63 billion ringgit to implement, Najib said today. They include seven highway projects at an estimated cost of 19 billion ringgit and two coal electricity generation plants at a cost of 7 billion ringgit, he said.

To contact the reporter responsible for this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net

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