Budget 2014 Malaysia can ill-afford to ignore debts, fiscal deficit tomorrow

by **Cals** Thu 24 Oct 2013, 13:23

Budget 2014 Malaysia can ill-afford to ignore debts, fiscal deficit tomorrow

Business & Markets 2013

Written by Ho Wah Foon of theedgemalaysia.com

Thursday, 24 October 2013 11:36

KUALA LUMPUR (Oct 24): Prime Minister Datuk Seri Najib Razak will have to address issues on fiscal deficit and explain how he will improve Malaysia’s public finance when he tables Budget 2014 to Parliament tomorrow.
Malaysia’s huge government debts and deteriorating fiscal condition, worsened by politically-motivated subsidies and handouts as well as pay rises to civil servants before the May 5 general election to force a victory of the ruling coalition, have to be addressed.
In fact, according to a government insider, foreign investors holding 40% of government bonds have in no uncertain terms told Malaysia its budget deficit will have to fall below 4% of GDP or risk the outflow of funds that could cause the ringgit to plunge.
Foreigners’ holdings of Malaysian government bonds were worth RM125.5 billion at the end of August. This accounted for about 28% of Malaysia’s total foreign reserves of RM444.9 billion at mid-October.
The government has said it aims to trim the deficit from 4.5% of GDP in 2012 to 4% in 2013 and 3.5% in 2014 before returning to a surplus by around 2020. But some analysts believe the deficit this year could be higher.
The deficit has pushed Malaysia's national debt to just under 55% limit of GDP this year from 43% in 2008.
If the prudent fiscal management is ignored, immediate repercussion could be a further downgrade to credit rating. In July, ratings agency Fitch cut its outlook on Malaysia's sovereign debt to negative from neutral.
“Najib needs to ensure that we don’t give any excuse to the ratings companies to do a downgrade on us because there will be hell,” Michael Lim Kheng Boon, a treasury director at RHB Bank Bhd, said at a Bloomberg seminar this week.
In fact, the premier’s own respected brother, CIMB Group Holdings Bhd’s group chief executive Datuk Seri Nazir Razak, has sent out an open warning to his powerful sibbling in Putrajaya.
On Monday, Nazir said he was expecting Budget 2014 to emphasise on “rejuvenating Malaysia’s fiscal health”.
He said any additional incentives and handouts should not be expected, given the government’s circumstances in dealing with its financial deficit.
“We have gone through a long period of incentives and we have to make sure that we put the public finances as priority. If the government gets that wrong, then it would have a negative impact on the ratings outlook, which would impact the cost of borrowing of corporates and individuals,” he told reporters on Monday.
In fact, slowing economic growth and shrinking trade surplus are also causing concern. Recently, the central bank cut its forecast for Malaysia’s full-year 2013 growth to 4.5-5.0% from 5-6% projected earlier.
Hence, Najib will have to send out a clear message that he will cut the country’s hefty subsidy bills on fuel and some food items, even if drastic steps could not be taken immediately for political and social reasons.
Subsidies take up about a fifth of government spending and the government this year has tabled two supplementary bills to increase Budget 2013.
The government has allocated 24.8 billion ringgit for fuel subsidies this year. All Malaysians are entitled to this subsidy, regardless of their financial standing.
But cutting down subsidies is not enough.
Najib, who is also Finance Minister, will have to stem financial wastage and scandals in various departments and agencies. Wastages have been highlighted by the Auditor-general in its annual reports.
In addition, Najib will have to introduce measures to raise and widen government revenue. And this means that he will have to introduce the Goods and Services Tax (GST), instead of postponing it again.
The long-delayed tax would replace the current narrower sales and service taxes. Currently, only about 10% of Malaysia's workforce pays income taxes.
If Malaysia implements an initial 4% goods and services tax, this will generate RM20.5 billion or as much as 14% of total tax revenue, said DBS in a recent Budget 2014 preview.
But the opposition alliance Pakatan Rakyat has suggested that GST be put on hold until real wages go up. "It should be on hold until minimum household wage is seen to be suitable to sustain the GST," said Opposition Leader Datuk Seri Anwar Ibrahim.
Observers say that since Najib’s men have secured their leadership positions in the just-over UMNO elections, Najib should now have a free hand to tackle the fiscal deficit and implement the GST.
Hence, under the current political scenario individuals and companies should not expect personal tax and corporate tax cuts.
Instead, increase in excise duties for the sin sectors – gaming, tobacco and liquor – may be on the table.
It is argued that punters will continue to gamble, drinkers and smokers will carry on with their habits come what may. Hence, earnings of these companies may not be hard hit by any increase in excise duties.
Najib is also widely expected to raise the property gains tax in a move to cool property prices, which have soared incessantly in recent years.
Pakatan has suggested that the Real Property Gains Tax (RPGT) return to the pre-2007 levels - where the rate is 30% for sales within the first year and the lowest rate is fixed at 5% for sales in the fifth year - to effectively curb speculation activities.
Najib is also expected to scale down or postpone some mega projects that achieve little economic benefit.
But while some are sceptical of the political will of the prime minister on prudent economic management, most analysts appear confident that Najib will deliever a fiscally responsible Budget.
By raising subsidised fuel prices recently and stating he will delay some infrastructure projects, the leader has injected optimism to the market. And for this reason, most investors continue to hold on to government bonds despite Fitch downgrade on Malaysia’s credit rating.
And Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar has also played a role to instil confidence. He said the government has taken note of the issues on fiscal deficit, high debts and narrowing current account surplus.