MALAYSIA'S budget deficit narrowed at a faster-than-expected pace last year, amid stronger economic growth and as the Government sold assets and cut spending on infrastructure.
The deficit narrowed to 4.3%, better than a September forecast of 4.5%, Second Finance Minister Tan Sri Nor Mohamed Yakcop said in an interview. The central bank will release details of the deficit tomorrow.
In presenting Budget 2005 in September last year, Prime Minister Datuk Seri Abdullah Ahmad Badawi pledged to cut the country's deficit to a six-year low of RM17.7bil, or 3.8% of gross domestic product.
“This Government does look more serious now about making some progress in reducing the fiscal deficit,'' said Brian Coulton, a Hong Kong-based senior director of Fitch Ratings, which raised its credit rating on Malaysia to A- on Nov 8.
“Fiscal policy intentions have improved, and that's been part of improving the credit outlook for Malaysia,'' he noted, but added that Fitch was not planning to raise Malaysia's ratings further for now, until the Government showed it could reduce its deficit faster than it was forecasting.
Moody's Investors Service cited the country's deficit-reduction efforts when it raised Malaysia's credit ratings in December.
In September, the Government raised taxes on cigarettes and alcohol and forecast a cut in so-called development spending, including money for roads, schools and other infrastructure, last year.
“We are in this phase of fiscal consolidation, and yet growth is good,'' Nor Mohamed said in an interview in Putrajaya on March 17. Malaysia's US$118bil economy, South-East Asia's third largest after Indonesia and Thailand, expanded 7.1% last year, the fastest pace in four years.
“You have to keep your house in order and in balance'' said Goh Han Hau, who helps manage the equivalent of US$395mil at Allianz General Insurance Malaysia. “The key thing is making sure the economy is resilient.''
Malaysia is still expected to remain in deficit this year, the eighth since the 1997 Asian financial crisis cut tax revenue and forced a spending programme aimed at lifting the economy out of a slump.
Abdullah's measures are “definitely working; we have to consolidate after the acceleration of spending on big projects,'' said Joe Wong, who helps manage the equivalent of US$13mil in assets at Easset Management in Kuala Lumpur.
Still, Nor Mohamed said, rising oil prices would be a challenge for Malaysia, which raised the price of diesel by 6% this month, the third increase in a year, to reduce the amount it paid to subsidise retail fuel prices and ease its financial burden.
“If the oil price affects the world, and the growth in the world slows down, of course we have to worry about that, too.
“Immediately, the first-round effect is not bad for us, because as an oil-exporting country, our revenue will go up.
“But we are worried about the second-round effect, because that could affect the growth of Europe, Japan and the US, and if there is a recession, or slowdown, then the demand for our products will go down, and that could be negative,'' Nor Mohamed said.
Malaysia's economic growth slowed to 5.6% in the fourth quarter, the smallest expansion in more than a year, as overseas demand for the country's electronics exports faltered.
“There's some slowing down, it's true, and we have to find new areas of growth, including agriculture, bio-technology, tourism and other services,” said Nor Mohamed.
“We expect the second half to be better than the first half this year and the Government is working very hard to meet its September forecast of 6% growth this year.”
Malaysia would seek to reduce its dependence on trade by boosting domestic consumption and investment, he said. – Bloomberg