Malaysia Budget Deficit Shrinks More Than Government Target

Malaysia trimmed its fiscal deficit to 3.9 percent of gross domestic product last year, after cutting government spending and state subsidies to avert a credit-rating downgrade.

Prime Minister Najib Razak narrowed the shortfall from 4.5 percent of GDP in 2012, beating the government’s 4 percent deficit target for last year. The central bank released the updated budget deficit estimate in a quarterly bulletin, citing preliminary government finance data. Malaysia wants to further reduce the budget gap to 3.5 percent this year and to 3 percent in 2015, before achieving a balanced budget by 2020.

Fitch Ratings lowered its outlook on Malaysia to negative from stable in July, citing public finances as the country’s “key rating weakness.” Najib cut subsidies on essential items including fuel and sugar, trimmed ministers’ entertainment budgets and froze proposals to renovate government offices.

“Achieving the government’s goal of a 3 percent deficit in 2015 still looks challenging without additional consolidation measures,” Andrew Colquhoun, Fitch’s head of Asia-Pacific sovereigns, said by e-mail today.

Record Investment

Najib unveiled a plan in 2010 to attract $444 billion of local and foreign private sector-led investment in Malaysia by the end of this decade, ranging from oil storage to a subway in Kuala Lumpur. Foreign direct investment into the country climbed more than 24 percent in 2013 to a record 38.8 billion ringgit ($11.7 billion) from a year earlier, the Ministry of International Trade and Industry said in a statement today.

“A key question for the ratings, amid ongoing shifts in investor attitude towards emerging markets, remains whether a re-acceleration of investment spending under the Economic Transformation Programme risks emergence of a twin public and external deficit later in the year,” Colquhoun said.

Malaysia’s economy expanded at the fastest pace in four quarters in the three months ended December as a recovery in advanced nations including the U.S. boosted demand for the country’s goods. GDP climbed 5.1 percent in the period from a year earlier, the central bank said yesterday.

“The timely implementation of fiscal and structural reforms will boost investors’ confidence and enhance private-sector investment,” Lee Heng Guie, an economist at CIMB Group Holdings Bhd., said in a report today. “We believe the government is on track to meet its fiscal-deficit targets.”

Ringgit’s Slide

The ringgit was little changed at 3.3235 against the dollar as of 12:15 p.m. in Kuala Lumpur and has fallen 7 percent over 12 months, according to data compiled by Bloomberg. Capital flight risk has weakened emerging-market currencies as the U.S. Federal Reserve pares stimulus.

Rebounding exports have countered Najib’s spending squeeze. Inflation risks are rising following subsidy cuts and the central bank may be moving closer to an interest-rate increase after keeping borrowing costs unchanged since mid-2011, according to Barclays Plc.

Inflation accelerated to 3.2 percent in December, the fastest pace in two years. Overseas shipments picked up in the second half of 2013, after a “lackluster” first six months of the year, the trade ministry said last week. Southeast Asia’s third-largest economy is projected by the government to expand 5 percent to 5.5 percent in 2014.

Before it's here, it's on the Bloomberg Terminal.