Published June 18, 2009

Scepticism over KL's bid to cut budget deficit

Economist says the deficit will remain sticky upwards for a couple of years

By S JAYASANKARAN
IN KUALA LUMPUR

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A GOVERNMENT plan to narrow the budget deficit by 2010 through a reduction in operating expenditure has met with some scepticism from at least one economist.

On Tuesday, Second Finance Minister Ahmad Husni Hanadziah told Bloomberg that Kuala Lumpur would narrow a yawning budget gap by cutting expenses to counter falling revenues. Mr Husni said that the government could do that by looking to cut operating costs while keeping development spending untouched.

Mr Husni's pledge underscores the perilous financial position of the federal government. This year's budget deficit is expected to top 7.6 per cent of gross domestic product (GDP), the largest such figure in 22 years.

The hole in Malaysia's books comes at a cost. On June 9, international rating agency Fitch lowered the country's long-term local currency rating to A from A+, the first time it had reviewed Malaysian debt since 1998. The agency said the budget deficit was the main reason behind the downgrade.

The steep spike in the deficit is largely due to the increased spending embarked upon by Kuala Lumpur to mitigate the effects of the global financial crisis. Malaysia has so far announced RM57 billion (S$23.5 billion) in additional spending, but even that will not prevent the economy from contracting.

Prime Minister Najib Razak, who is also Finance Minister, said recently that the economy would shrink by between 4 and 5 per cent in 2009. The economy contracted by a larger-than-expected 6.2 per cent in the first quarter of the year, underscoring the seeming optimism of Mr Najib's prediction.

It could also be why Manokaran Mottain, an economist with the Arab-Malaysian Banking Group, thinks Mr Husni's idea might be easier said than done.

'In our opinion, this could be rather challenging with the economy in crisis,' Mr Manokaran wrote in a research report yesterday.

He said that operating expenses for the federal government would amount to RM154.2 billion in 2009 while development spending would, after the stimulus package, rise to RM51.7 billion. Meanwhile, revenue would remain at a 'steady' RM168.7 billion.

Mr Manokaran noted that oil revenue alone would account for almost 17 per cent of the government's total funds.

'In our view, the deficit would remain sticky upwards for a couple of years, before easing after 2010,' the economist noted. 'Besides, revenues would remain weak with no significant improvement in collection.'

Even so, the economist was considerably more optimistic than Mr Najib. He estimates that GDP growth for the whole year would come in at minus 2 per cent because of positive growth in the final quarter of 2009.