Malaysia: Budget Concerns Lower GDP Growth Forecasts

Philippines 2

Strong domestic demand, particularly for investment, has kept real GDP growth at elevated rates over the past three years as the government ramped up public spending. While growth has been impressive, the consequences of spurring domestic consumption have saddled the country with a deteriorating budget deficit and a dwindling current account surplus. Following a downgrade to Malaysia’s outlook in July by Fitch Ratings, a leading credit rating agency, the government hiked subsidized fuel prices and said it would delay some infrastructure projects. In a further move to restore investor confidence and help plug the hole in the fiscal account, policymakers are considering a goods and services tax for 2014 in the fiscal plan due to be unveiled later this month. However, concern is growing over the government’s ability to pare down its national debt after it asked for an additional RM14.1bn to cover unplanned overspending for this year. This follows an earlier payment in July for an extra RM13.0bn to cover gaps in the 2012 budget. Soaring national debt, which is approaching the 55% of GDP constitutional debt ceiling, along with rising household borrowing, is casting a dark shadow over the country’s fiscal outlook.

Meanwhile, the country’s external accounts showed some signs of improvement in August after both exports and imports rose. The former was up 12.4% (y-o-y), while the latter advanced by 14.1% on the back of strong demand for capital, intermediate and consumption goods. August’s trade surplus widened to RM7.1bn, up from RM2.9bn in July. The rollout of fiscal consolidation measures should help to curb import growth going forward. Still, the trade surplus is expected to drop to US$29.7bn for this year, while the current account surplus looks set to halve from the 2012 level.


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