Published October 23, 2009

KL budget expected to have sharper deficit cut

	Email this article
	Print article
	Feedback

(KUALA LUMPUR) Malaysia's government plans to announce a much-bigger- than-expected reduction in its 2010 fiscal deficit when it lays out its budget today in a move expected to support the ringgit and ease concerns over bond supply.

A source with direct knowledge of the process told Reuters that Prime Minister Najib Razak would unveil plans to cut the budget deficit to 5.5 per cent of gross domestic product (GDP) from a planned 7.6 per cent this year, the biggest in two decades.

Economists in a Reuters poll had forecast the 2010 deficit would be 7.3 per cent of GDP.

'The smaller deficit in 2010 will be achieved through fiscal consolidation, more carefully managed spending,' said the source, who spoke on condition of anonymity due to the sensitive nature of the issue.

Investors, who have shied away from Malaysian markets in the wake of the global financial crisis, will be watching today's announcement closely to see how Malaysia will implement the budget deficit reductions.

'It remains to be seen whether the ambitious targets will be met,' said Citibank economist Kit Wei Zheng.

Mr Najib is still hammering out the final details of the budget, his website (www.1malaysia.com.my) says, and has said he plans a 'people's budget'.

The prime minister also holds the finance minister's post and is due to announce in the budget that Malaysia's trade-dependent economy will shrink less than the expected 4-5 per cent this year.

According to the source, Mr Najib will forecast that Malaysia's economy will contract by 3 per cent this year and that it will grow by 2-3 per cent in 2010.

'The government expects all main economic sectors to record positive growth next year,' the source said.

Yields on Malaysia's benchmark five-year bonds fell after the news on the budget and by 0653 GMT, they were at 3.845 per cent, less than the 3.897 per cent they were at prior to the news.

'The fiscal deficit target is very impressive, especially from the ringgit perspective,' said Suresh Kumar Ramanathan, regional foreign exchange and rates strategist at Malaysian investment bank CIMB.

'It is a massive scaledown in the deficit and very positive for the market,' he said.

The ringgit was, however, hit yesterday by a bounce in the dollar off 14-month lows and was trading at 3.39 to the US currency, off its best levels of around 3.36.

The budget deficit expanded in 2009 despite the strength of oil prices, which provide almost half of the government's income. Even in years of healthy economic growth, the budget deficit had grown and missed targets.

'I would say it's quite an optimistic target which the government would have to actively try to achieve,' said Irvin Seah, economist at DBS Bank in Singapore.

'I think the main implication will be on the government's expenditure. Probably we will see quite aggressive cuts in government spending. But it remains to be seen on which parts of expenditure they would target,' he said.

Spending in 2009 has been boosted by a 67 billion ringgit (S$25.5 billion) package of aid and loan guarantees, spread over two years, in a bid to counter the global economic downturn.

Alvin Liew, economist at Standard Chartered, forecast a 2010 deficit of 7.5 per cent of GDP and he expects it to narrow to 5 per cent only in 2012.

Investors will also be looking to see whether Malaysia sets out plans for widening its tax base, possibly by setting a timeframe for a goods and services tax and reducing energy and food subsidies. -- Reuters