PETALING JAYA: The Government is expected to exercise financial discipline even though the coming budget, which will be unveiled tomorrow, is the last one before the next general election.
Economists said Prime Minister Datuk Seri Najib Tun Razak was expected to target a lower federal government budget deficit compared with 3% this year.
“The overall debt levels are also expected to be lower, considering that there is a cautious outlook on the global economy and oil prices are still soft,” said an economist.
Towards this end, the International Monetary Fund (IMF) recently said in its report that while the global economy was expected to see marginal growth in 2018, the recovery was not complete.
It said that growth remains weak in many countries and inflation is below target in most advanced countries.
Commodity exporters, especially fuel, continue to be hard hit by the adjustments to the low oil prices.
The economist said that Malaysia, however, was able to count on higher collections from oil and the Goods and Services Tax (GST) to help it fund its development and operating expenditure.
“The higher collections should enable the Prime Minister to continue development spending at the current pace and yet maintain fiscal discipline,” said another economist.
The Government is looking at achieving a near balanced budget by 2020 compared to the negative 3% this year. However, of late economists have said that achieving anywhere near the balanced budget figure will not likely be achieved in the next five years.
“Nevertheless if the deficit is lower than previous years, it is something that will earn Najib points for exercising restraint in unveiling a responsible budget,” said a tax consultant.
The tax consultant said foreigners could be encouraged if the general debt levels were lower.
Meanwhile, Bloomberg reported that the Malaysian bond market will see improved sentiments if the intention to reduce the budget deficit is put into action.
“The case for ringgit assets is fairly constructive,” said Wilfred Wee, a fund manager in Singapore at Investec Asset Management Ltd, which oversaw US$132bil at the end of September.
“The hope or expectation is that the commitment to a balanced budget plan remains intact. If we see this translated into action, as in a significantly narrower 2018 deficit target than this year’s, there is room for Malaysian government bonds to outperform.”
Optimism over an improving economic outlook saw global funds flow almost RM8bil into Malaysian bonds in September. Even with those purchases, holdings have still fallen RM14.8bil this year.
Aberdeen, which oversees the equivalent of US$770bil worldwide, is cautious on Malaysian debt and the ringgit, citing the impact of rising US interest rates and the Federal Reserve’s decision to unwind its balance sheet. There’s limited room for the government to unveil an expansionary budget as it seeks to further narrow the deficit, said Lee Jin Yang, a macro research analyst at the money manager in Singapore.
“Prime Minister Najib will try his best to balance out these conflicting needs,” he said.
“Hence it is likely to be more redistributive rather than aggressively expansionary.”
Aberdeen will be “more comfortable adding risk” should valuations get more attractive before the election, he said.
Aviva Investors favours Malaysian assets, saying the ringgit “screams as being the cheapest” among 26 currencies it tracks.
The central bank’s measures constraining the amount of foreign currency proceeds exporters can hold have also boosted sentiment towards the ringgit, the money manager said.
“The incumbent government will win the election,” said Stuart Ritson, Singapore-based head of Asian rates and foreign exchange at Aviva Investors, which oversees more than US$437bil.
“Foreigners are beginning to come back to the market.”
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