A customer counts her ringgit notes outside a money changer at the central business district in Singapore August 25, 2015. REUTERS/Edgar Su/Files

Malaysia Cuts Growth Targets, Sees Wider Budget Deficit Through 2020


OCTOBER 20, 2018

Kuala Lumpur. Malaysia will see wider fiscal deficits and slower economic growth than earlier forecast for this year and through 2020, the government said on Thursday, underscoring the challenges facing Prime Minister Mahathir Mohamad's administration.

Unveiling new forecasts in the midterm review of the five-year development plan, the government said it would cut development spending and rely more on the private sector to spur growth.

The changes could have an impact on Malaysia's sovereign credit ratings, which rating agencies have warned could take a hit if the government cannot narrow its budget deficit. The revised forecasts also presage an austere 2019 budget, due to be announced on Nov. 2.

"Cost-saving measures over 2018-2020 may affect economic growth, but that is only temporary," Mahathir said when presenting the review of the 11th Malaysia Plan in parliament.

Through governance improvements and increased revenue, the government "is confident that our fiscal position can recover by the end of 2020," he said.

The government now targets a fiscal deficit of 3 percent of gross domestic product in 2020. Originally, the plan predicted a balanced budget that year.

The previous government of Najib Razak forecast the deficit to narrow to 2.8 percent this year from 3.0 percent in 2017 – a target the Mahathir government said it cannot achieve.

The fiscal deficit is expected to "temporarily be beyond the target set during the last budget before reverting to the fiscal consolidation path," Thursday's report said, adding targets will be "flexible" during the transition period.

Trimmed Growth Forecasts

For economic growth, Malaysia now projects 4.5 percent to 5.5 percent a year for 2018-2020. The plan Najib tabled in 2015 aimed for 5 to 6 percent per annum over the five years.

Mahathir also said this year's growth will be 4.5 percent to 4.9 percent, lower than the earlier 5 percent forecast.

He has blamed Najib for Malaysia accumulating debt of over 1 trillion ringgit ($240.67 billion), and on Thursday reiterated that 2019 expenditure will have to be cut to pay off those debts.

The new government has already cancelled billions of dollars of public projects and said it may introduce new taxes and sell assets to repay debt.

While in power, Najib halved the fiscal deficit from 6.7 percent in 2009. He introduced an unpopular goods and services tax (GST) amid a decline in oil prices that cut a key government revenue source.

This placated ratings firms, which maintained Malaysia's ratings within the A band even as the country grappled with weak global demand for commodities, and as the former premier faced graft allegations linked to state fund 1Malaysia Development Berhad (1MDB).

But Mahathir scrapped GST, as promised, soon after his coalition's stunning May victory, replacing it with another tax structure that would only bring in half the revenue.

On Thursday, the government cut its five-year development spending target by about 15 percent, setting a new ceiling of 220 billion ringgit.

"Further private sector involvement in driving the economy will alleviate the impact of the reduced investment from the public sector," it said.

The government expects private consumption to continue to prop up the economy, with its annual growth in 2016 to 2020 averaging 6.8 percent.

Exports are seen expanding an average 7.5 percent over the five years, instead of 4.6 percent. The plan now targets a 118.3 billion ringgit trade surplus in 2020, double the original 57.3 billion ringgit goal.