March 25 (Bloomberg) -- Malaysians like cab driver Ramakrishnan Ramachandran are getting used to handouts from the government as the next election looms. The budget deficit is set to show the strain regardless of who wins the vote.
From smartphone rebates to household electricity subsidies and higher wages for civil servants, Prime Minister Najib Razak has gone on a spending binge to woo voters ahead of polls that must be held by late June. In 2012, he announced a 35 million ringgit ($11 million) voucher program to help taxi drivers pay for new tires, and yesterday said 1,000 of them will get a grant to offset the cost of a new car from Proton Holdings Bhd.
“The government simply throws the money,” Ramachandran, 54, said as he waited for passengers outside a Kuala Lumpur shopping mall, adding that the 520 ringgit he received for the wheels won’t deter him from voting for the opposition for the first time. “Whatever the government gives, I take.”
The opposition, attempting to break the ruling coalition’s hold of more than five decades on power, is also prepared to be generous as it promises free university education, lower fuel prices and the elimination of toll fees. Any fiscal deterioration from persistent largesse could raise the risk of capital outflows should the U.S. shift to tightening monetary policy, triggering a reversal in the flood of cash into emerging markets in recent years.
“No one will be overly alarmed by whether Malaysia can pay for its spending now but its fiscal trajectory is not a pretty thing,” said Vishnu Varathan, a Singapore-based Mizuho Corporate Bank Ltd. economist who has covered Malaysia for seven years. “Should investors start pulling money out of emerging markets, Malaysia is not at the top of the hit list but the sustainability of the fiscal situation is a concern for longer-term investors.”
Southeast Asia’s third-largest economy has reported 15 years of budget deficits, and elevated spending has prompted credit rating companies to highlight risks to government finances even as growth accelerates. Last week, the central bank said the economy may expand as much as 6 percent this year, compared with an earlier forecast of up to 5.5 percent.
“There’s a danger that after the election, if it’s a close outcome the government may not have the will to carry out tough reforms” and curb spending, said Chua Hak Bin, an economist at Bank of America Corp. in Singapore. “Overall, the risk is for the fiscal deficit to deteriorate.”
Support for the prime minister is the lowest since 2011, with his approval rating falling to 61 percent in February from 63 percent in December, according to a survey from the Merdeka Center for Opinion Research.
The prospect of an even closer election result than the 2008 vote, when the ruling National Front coalition won by its narrowest margin in more than five decades, has helped make the FTSE Bursa Malaysia KLCI Index the worst performing Southeast Asian benchmark this year. The ringgit has weakened 1.3 percent against the U.S. dollar in 2013, while an index of Malaysian local-currency debt compiled by HSBC Holdings Plc has returned 0.9 percent this year, outperforming six other Asian markets.
In Asia today, Singapore reported inflation quickened in February, while Taiwan’s industrial output fell in the same month from a year earlier. Consumer confidence in Italy declined this month, while the Federal Reserve Bank of Chicago and its Dallas counterpart will release economic indicators.
Cyprus agreed to the outlines of an international bailout in overnight talks, paving the way for emergency loans and eliminating the threat of default.
Najib has pledged to balance the budget by 2020 from more than 4 percent of gross domestic product last year, saying rising revenue has enabled the country to fund socio-economic programs. Still, government spending in 2012 exceeded original budget projections by about 2 percent of GDP, particularly in wages, pensions, fuel subsidies, and transfers, the International Monetary Fund said last month.
“We are having a race to the bottom, we are having a race on who can be more populist than the other,” said Wan Saiful Wan Jan, chief executive of the Institute for Democracy and Economic Affairs in Kuala Lumpur. “Whatever the scenario, the likelihood is Malaysia will be heading towards a welfare state and the impact on the economy will be long term.”
Najib, 59, must dissolve Parliament by April 28 and hold the poll within 60 days. The prime minister’s planned 251.6 billion ringgit budget for 2013 includes cash handouts for low-income families and higher pensions for civil servants. He has temporarily shelved a plan to cut subsidies on the widely used RON 95 grade of gasoline since 2010 and hasn’t given a date to start a goods and services tax.
This month, Najib said cash transfers to poor households will take place annually.
The opposition People’s Alliance coalition, led by former Deputy Prime Minister Anwar Ibrahim, has pledged to increase the threshold for tax payers charged the highest rate to 400,000 ringgit from 250,000 ringgit, and spend 13 billion ringgit to build “affordable homes.” On top of free education in public universities, students who aren’t “well-off” would be given an allowance for food, lodging, books and transportation.
The budget deficit is forecast by the government to shrink to 4 percent of GDP this year from 6.6 percent in 2009. The country “has been successful in moving towards near-budget neutral by 2020,” the government said in a report this month.
The IMF said last month contingent liabilities for the government are growing from the rise of its statutory guarantees, which in part reflect borrowing by special-purpose vehicles set up to finance large public infrastructure projects. The guarantees have increased to 15 percent of GDP, from less than 10 percent in 2008, it said.
Standard & Poor’s said in September that it may lower Malaysia’s ratings if the government can’t deliver on measures such as the implementation of a goods and services tax or changes to its subsidy program to reduce the deficit.
That will hinge on how many voters there are like Syed Abdul Kadir. The Kuala Lumpur taxi driver receives cash handouts to supplement his income and said government scholarships allowed his daughter to become a doctor and his son an engineer.
“I tell my kids every morning to thank God they were born in this country,” said Syed, 49. “The government has given us many good things.”
Eleventh-hour handouts aren’t enough for Ramachandran.
“It’s not in a proper way, it’s like rasuah,” he said, using the Malay word for bribery. “I want to change the government and see what happens for the next five years.”
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