Malaysia's new administration is optimistic it can balance the books despite forgoing revenue after scrapping the unpopular goods and services tax (GST) and uncovering RM1 trillion (S$338 billion) in liabilities, which were far higher than expected.
Government sources told The Straits Times that the Finance Ministry (MOF) is confident it can lower spending to cover the shortfall in revenue, because the former Najib Razak administration had entered into overpriced deals and overstated its GST income.
Pakatan Harapan's populist move to effectively scrap the GST three weeks after its surprise win at the May 9 polls was met with scepticism and panic, sending many local and foreign investors fleeing from the market.
After all, the government stands to lose RM21 billion in revenue in the last seven months of the year as a result.
Nevertheless, this lost revenue was lower than expected, compared with the previous government's estimate that GST would bring in RM45 billion for this year.
"They were withholding a fair amount of GST refunds. Collection could be RM10 billion less than stated," a government official told The Straits Times.
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Projects under review
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KUALA LUMPUR-SINGAPORE HIGH SPEED RAIL: RM110b
Malaysia has said it wants to shelve the project but wants to negotiate a cancellation fee due to Singapore, which has spent $250 million on the project.
EAST COAST RAIL LINK: RM81b
Work has been suspended as Malaysia wants to scrap the line but with RM20 billion (S$6.8 billion) already drawn down, it will need to negotiate new terms with China.
LIGHT RAIL TRANSIT 3: RM31b
The project is under scrutiny after cost overruns from an initial RM9 billion price tag.
MASS RAPID TRANSIT LINE 3: RM40b
The project is cancelled but as it completes the Klang Valley's urban rail transport network, it could be revived.
BANDAR MALAYSIA: RM200b
The Finance Ministry is looking at ways to unlock value from the 197hae plot. But it seems less lucrative now that several rail links are up in the air.
TWO GAS PIPELINES: RM10b
A stop-work order has been issued. About RM1 billion has been spent on consultancy fees and 88 per cent of financing drawn down with only 13 per cent of the project completed.
MOF says it will cover nearly half of the GST shortfall with the billions saved from reviewing several big-ticket infrastructure deals entered into by the former administration.
Several mega projects are already in Kuala Lumpur's crosshairs, such as the RM110 billion high-speed rail (HSR) to Singapore and the RM81 billion China-backed East Coast Rail Link.
Finance Minister Lim Guan Eng told The Straits Times last week that some contractors say they can execute the Malaysian portion of the HSR for half the price.
Other deals - some handed out without an open tender - are being scrutinised. Many have already been renegotiated with slimmed-down tender specifications, resulting in billions saved, say ministry sources.
Mr Lim had said on May 31 that a fiscal deficit of 2.8 per cent for 2018 - a target set by the former Barisan Nasional government - would be maintained.
Prime Minister Mahathir Mohamad had also set a goal of reducing public debt from RM1.1 trillion to RM800 billion. While this remains a tall order, much headway has been made in early renegotiations of government contracts.
Mr Lim also revealed on Tuesday that the cost of a third Light Rail Transit (LRT3) in the Klang Valley had ballooned to RM31.45 billion, more than triple its initial estimates.
"Certain news reports have indicated that the LRT3 cost can be reduced by RM6 billion. The Ministry of Finance wishes to state that much more than RM6 billion must be reduced if the LRT3 project is to proceed," he said in a statement.
A source familiar with the project told The Straits Times that the initial estimate of RM9 billion had soared due to unnecessary specifications such as underground tunnelling despite available surface land, station designs benchmarked to the larger Mass Rapid Transit, and additional trains.
"Based on ridership projections, this means it will be running additional expenses but not using the extra capacity," said the source, who added that negotiations had yielded as much as RM15 billion in savings.
These construction and infrastructure firms have been among the hardest hit on the Malaysian bourse after the government said it would be reviewing mega projects.
The government holds some leverage as these firms would prefer to trim their profit margins rather than face empty order books, according to industry experts.
"There's some willingness to cooperate but not fully. So (the question is) whether that's enough to match the target price to make it financially viable," Mr Lim told The Straits Times.
Whether these cost-cutting measures are enough to lure back investors remains to be seen.
In the two months since the election, Malaysia's stock market has lost US$33 billion (S$45 billion) in value, while foreign investors have dumped close to RM20 billion worth of Malaysian bonds.
Meanwhile, the new government has to fulfil more populist election pledges that will lower revenue and raise expenditure, like scrapping highway tolls, raising the minimum wage, building more affordable housing and increasing fuel subsidies.
