Mahathir Targets Biggest Malaysian Budget Deficit Since 2013

Nov 02 2018, 8:00 AMNov 02 2018, 8:56 AMNovember 02 2018, 8:00 AMNovember 02 2018, 8:56 AM

(Bloomberg) -- Malaysia’s government will push its budget deficit to the highest in five years and seek to draw more income from the state oil company to help plug the shortfall.

In the first budget since Prime Minister Mahathir Mohamad took office in May, the government is widening its deficit target for this year to 3.7 percent of gross domestic product from a 2.8 percent target under the previous government. The median estimate in a Bloomberg survey of nine economists was 3.2 percent.

The shortfall is set to ease to 3.4 percent next year, according to reports released by the government as part of Finance Minister Lim Guan Eng’s 2019 budget speech on Friday. To fund the gap, the government will more than double the amount of dividends it expects to receive next year from state oil company Petroliam Nasional Bhd to 54 billion ringgit ($13 billion).

Malaysia’s deteriorating fiscal picture is a worry for investors and a risk to the nation’s credit rating. Mahathir needs to find more revenue after his scrapping of a consumption tax soon after winning the May 9 election left a hole in the government’s finances. His focus has been on rooting out corruption and curbing wasteful spending.

The budget comes against the backdrop of a slowing economy and rising global trade risks. Growth is forecast to ease to 4.8 percent this year from almost 6 percent in 2017, and reach 4.9 percent in 2019.

1MDB Woes

The ringgit briefly pared gains after the government’s economic forecasts were released, before recovering to trade 0.3 percent higher at 4.1663 per dollar as at 4.47 p.m. in Kuala Lumpur. The yield on 10-year government bonds was down 1 basis point to 4.09 percent.

Lim started his speech in Parliament by listing out the bad hand dealt to the nation by the previous government under Najib Razak. That includes 43.9 billion ringgit of payments Malaysia must make on behalf of troubled state fund 1MDB. Najib’s government has already paid almost 7 billion ringgit of 1MDB’s outstanding obligations, he said.

The new government is also saddled with 35.4 billion ringgit of unpaid tax refunds, while the amount of contingent liabilities has jumped 244 percent to 238 billion ringgit in the decade through last year.

Here are other key details:

State revenue target lowered to 236.5 billion ringgit in 2018, from 239.9 billion ringgit previously. For 2019, it’s set at 261.8 billion ringgit
Petronas, as the state oil firm is known, will need to transfer 54 billion ringgit to the government in 2019, including a 30 billion ringgit one-off special dividend. The company is expected to contribute 26 billion ringgit this year
Subsidies and social assistance will decline to 22.3 billion ringgit in 2019 from 28.1 billion this year, mainly due to the scaling back of cash transfers and the reintroduction of market-determined fuel prices
Budget deficit is seen easing to 3 percent in 2020 and 2.8 percent in 2021
The current-account surplus is seen in a range of 2.5 percent to 3 percent of gross national income this year, and 2 percent to 3 percent in 2019
Inflation is estimated in a range of 1.5 percent to 2.5 percent in 2018, picking up to 2.5 percent to 3.5 percent in 2019
Monetary policy is set to remain accommodative and supportive of growth in 2019, while the ringgit is likely to become more reflective of underlying fundamentals when external uncertainties subside

The government is banking on the private sector to pick up the slack left by state spending cuts, with rising demand expected to boost growth in services industries and manufacturing set to be supported by electronic exports, Lim said in the report. Consumers are likely to contribute to economic expansion as stable employment and wage growth encourage them to spend, he said.