Malaysia Targets 5.5% Growth as Najib Pledges Fiscal Prudence

Malaysia forecast growth of as much as 5.5 percent next year as Prime Minister Najib Razak pledged to support the economy while taking steps to meet the government’s budget-deficit reduction goals.

Gross domestic product may expand 5 percent to 5.5 percent in 2014 from an estimated 4.5 percent to 5 percent this year, according to the Ministry of Finance’s 2013/2014 economic report released today in conjunction with the budget speech. The fiscal deficit will shrink to 3.5 percent of GDP next year from 4 percent in 2013, meeting the target set previously.

“While supporting the growth momentum, we are fully aware of the need to be fiscally responsible,” Najib said in the report. “We are also pursuing better targeted, efficient and effective government expenditure. One of the measures towards this goal is to gradually carry out subsidy rationalization, with complementary measures to assist the vulnerable groups.”

Najib, 60, began shifting his focus to improving government finances and averting a credit rating downgrade after cementing his leadership of the country in a May general election and retaining his grip on the ruling party this month. Having given handouts to the poor and pay increases for civil servants to woo voters earlier, he is now under pressure to introduce a potentially unpopular consumption tax and curb spending.

Stocks, bonds and the ringgit advanced this week on optimism the prime minister will follow through on politically unpopular revenue-generating measures after Fitch Ratings cut Malaysia’s credit outlook to negative in July, citing rising debt levels and a lack of budgetary reform.

Stocks Rise

The FTSE Bursa Malaysia KLCI Index of shares climbed to a record close yesterday. The ringgit gained this week after touching a four-month high of 3.1413 on Oct. 18. It has appreciated more than 3 percent in October, the second-best performance among Asia’s 11 most-traded currencies behind Indonesia’s rupiah.

The government will further cut state subsidies, broaden its tax base and manage spending “prudently,” Najib said in an Oct. 11 interview. Cabinet would meet before the 2014 budget is released to decide if there’s enough public support to introduce a goods and services tax, he said then.

Protests against the consumption tax were planned in several locations nationwide this week by a citizen group called Oppressed People Network, a sign of the resistance Najib may face if he proceeds with the levy. About 50 people gathered outside Parliament today before Najib began his 2014 budget speech, carrying banners to reject any GST.

Easing Burden

Should the government decide to implement a GST, the current sales tax and service levy will be abolished, according to the finance ministry report.

To lighten the burden on the lower-income groups, essential food items such as rice, sugar, meat and vegetables may be zero-rated while services including public transport may be exempted from the new tax, the report said. Najib also targets to start implementing a comprehensive social safety net in 2015, he said in the report, without giving details.

Najib’s government is forecasting federal spending of 262.2 billion ringgit ($83 billion) in 2014, according to the finance ministry’s report. Total expenditure for this year is estimated at 261.3 billion ringgit, 4.6 percent more than originally budgeted.

The administration will cap debt service charges at below 15 percent of revenue and total federal government debt within 55 percent of GDP to make sure its finances remain healthy, it said.

Malaysia’s current-account surplus is estimated to narrow to 26.6 billion ringgit this year from 57.3 billion ringgit in 2012, the report showed.

“The government will do what is right for our economy,” Najib said in a statement yesterday. “Some measures may not be popular now, but over the medium term what is good for the economy is also good for the people.”

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