Oil slump forcing Malaysia to cut spending, widen fiscal deficit target

KUALA LUMPUR: Prime Minister Datuk Seri Najib Razak is widely expected to cut 2016 spending and raise fiscal deficit targets on Thursday as poor oil prices disrupt budget plans unveiled three months ago.

Economists expect budget spending to be cut about 2.5 percent, or nearly 7 billion ringgit ($1.65 billion), and the fiscal deficit target to be raised to 3.3 percent of gross domestic product from 3.1 percent.

Some also expect this year's GDP growth forecast to be lowered from the current 4-5 percent target, which they say is unrealistic.

This is the second straight year Najib has been forced to revise the budget due to woes rooted in the oil price, which is pivotal to Malaysia's economy.

The country exports liquefied natural gas, whose price depends on crude oil. In the 2016 budget unveiled in October, Najib assumed oil prices would average $48 a barrel but they are now around $30.

The earlier-scheduled budget revisions are being announced two days after Malaysia's attorney-general cleared Najib of any criminal offences or corruption, closing investigations into a multi-million dollar funding scandal that his opponents had hoped would bring him down.

Najib continues to face economic woes, including slowing growth, a big slump in the ringgit - which was Asia's worst-performing currency in 2015 - and a public outcry over rising costs.

"Fiscal space is limited," said Barclays economist Rahul Bajoria. "A lot of the cuts will be from operating expenditure."

The government will shelve non-priority development projects, state news agency Bernama reported this month.

AN ENDANGERED STREAK

"The biggest challenge for Malaysia is actually something they can't control and that is oil prices, said ANZ economist Weiwen Ng. "Markets could be forgiving to an extent if they stress their commitment to narrowing the fiscal deficit."

Sticking to the 3.1 percent target would mean much sharper spending cuts, he said.

Najib has been able to lower the fiscal deficit every year since taking power in 2009, but that is in danger now, with the expected 0.2 percentage point increase.

A sharp increase in the deficit target could put Malaysia's sovereign ratings at risk.

In October, Najib delivered a popular budget, giving cash to low income families and taxing the rich.

OCBC economist Wellian Wiranto expects Malaysia will "cut expenditure to a lesser degree while stomaching a larger deficit target".

He expects a 0.5 percentage point cut in the economic growth target. - Reuters