May 7, 2018 / 9:18 AM / 3 months ago

Poll promises in Malaysia signal a longer road to fiscal strength

KUALA LUMPUR (Reuters) - In the run-up to Malaysia’s general election this week, the ruling alliance has promised to increase cash handouts while the opposition says it will roll back a consumption tax, prompting some economists to say that, whoever wins, fiscal reform will be delayed.

FILE PHOTO: A view of Kuala Lumpur City Centre (KLCC) in Malaysia August 15, 2017. REUTERS/Lai Seng Sin/File photo

Malaysia, Southeast Asia’s third-largest economy, recorded 5.9 percent economic growth in 2017, its best performance in three years. The surge is likely to have persuaded Prime Minister Najib Razak to call the election earlier than August, when it was due, political analysts have said.

His Barisan Nasional (BN) alliance is widely expected to retain power despite a robust opposition challenge.

Rising costs of living have been a major issue in the campaign and both Najib and his chief opponent, former long-serving premier Mahathir Mohamad, have made lavish promises to address the issue.

BN has promised to expand cash handouts - in some cases nearly double payouts to some low income families - and erase some debts of operators of palm plantations under the state-owned agency Felda.

The Mahathir-led opposition bloc has vowed to roll back an unpopular goods and services tax (GST) introduced in 2015 by Najib and reinstate petrol subsidies in the first 100 days if it wins.

“The raft of giveaways announced in BN’s manifesto mean that the government is unlikely to meet its target for 2018 of reducing the deficit from 3.0 percent to 2.8 percent of GDP. The move is likely to mean that deficit reduction will carry on past 2023,” Gareth Leather, senior Asia economist at Capital Economics, said in a recent research report.

“A Mahathir victory would throw fiscal consolidation even further off track.”

Yeah Kim Leng, an external member of the Malaysian central bank’s Monetary Policy Committee, said BN’s promise to almost double cash handouts could cost the government about 4 billion ringgit ($1.01 billion) additionally in 2018.

And if Mahathir’s bloc abolishes GST and replaces it with another tax as promised, the government could face a revenue deficit of about 20 billion ringgit in 2018, he said.

In the current budget, the government has projected a deficit of 39.8 billion ringgit amounting to 2.8 percent of projected GDP.

“(Political parties) need to ensure fiscal sustainability is not too adversely affected. The threat of being downgraded by international rating agencies will be very costly to financial markets,” Yeah told Reuters.

Other than meeting fiscal deficit targets, the new government will also have to keep Malaysia’s debt level below a self-imposed target of 55 percent, he said.

Johari Abdul Ghani, Malaysia’s second finance minister, told local media last month that the cash handouts would not affect the fiscal deficit target of 2.8 percent, as the government has gained extra income from the rise in crude oil prices.

TRACK RECORD

Najib has been able to lower Malaysia’s fiscal deficit every year since taking power in 2009 and that has been significant for maintaining the country’s investment-grade sovereign credit ratings.

But ratings agencies have raised some concerns over further reduction in deficit: In February, Moody’s said further fiscal consolidation “is likely to be very slow absent any meaningful revenue-raising measures,” which it said the past two budgets did not have.

Malaysia has already pushed back on a target of a balanced budget by 2020, saying it would need another two to three years to reach the goal.

Moody’s said in a report last week that the impact of the campaign promises by both parties on Malaysia’s sovereign credit will depend on how the proposed measures are funded and if on-going efforts at fiscal consolidation will be delayed.

Markets have been largely stable in the run up to the elections on expectations that Najib will retain power.

Frank Benzimra, head of Asia equity strategy at Societe Generale, said markets were expecting a Najib victory.

“Any disappointment, which would result in questioning the currently good economic momentum, would create some short-term ripples,” he said.

Reporting by Liz Lee; Writing by A. Ananthalakshmi; Editing by Praveen Menon and Raju Gopalakrishnan

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