KL set to expand budget amid weak economic outlook

Malaysia, the third-largest economy in South-east Asia, bucked a global cooling trend and grew faster than expected over the first half of this year, but analysts say growing protectionist policies around the world will eventually drag on the trade-r
Malaysia, the third-largest economy in South-east Asia, bucked a global cooling trend and grew faster than expected over the first half of this year, but analysts say growing protectionist policies around the world will eventually drag on the trade-reliant country. PHOTO: REUTERS

KUALA LUMPUR • Malaysia's government will likely present an expanded budget on Friday to temper a weak economic outlook, as it grapples with global recession fears, the protracted US-China trade war and a large debt pile left behind by its predecessors.

South-east Asia's third-largest economy - after Indonesia and Thailand - bucked a global cooling trend and grew faster than expected over the first half of this year, but analysts say growing protectionist policies around the world will eventually drag on the trade-reliant country.

Prime Minister Mahathir Mohamad's government will at the least need to sustain its development spending to prop up domestic demand next year, economists have said, even as it continues to deal with RM1 trillion (S$329.7 billion) in debt blamed on embattled former premier Najib Razak's administration.

"We think Budget 2020 will likely include a contingency plan to counter the effects of a slowdown from the US-China trade war - a so-called mini-fiscal stimulus package," RHB Investment Bank said in a note.

The contingency fund, which the bank estimated could amount to RM3 billion, will be on top of an estimated RM55 billion that the government will likely set aside for its 2020 development budget, RHB said.

Tun Dr Mahathir's government bucked expectations when it tabled an expanded budget in November last year in a bid to boost revenue despite the slowing economy. It also set a higher fiscal deficit target over the next few years to make room for domestic spending while chipping away at its debt.

China and Malaysia resumed a massive Belt and Road Initiative rail project in July at a heavily discounted cost after a year-long suspension of the project by Dr Mahathir, who followed through on an election pledge to renegotiate or cancel "unfair" Chinese mega projects approved by Najib.

An expanded budget for next year could mean a slower pace of fiscal consolidation than forecast by the government, though it is something to be expected with the soft outlook, said Standard Chartered Bank.

In July, Finance Minister Lim Guan Eng said it would be difficult to meet the 3 per cent fiscal deficit target for next year due to uncertainties around the US-China trade war. The government had earlier announced a fiscal deficit target of 3.4 per cent this year and 2.8 per cent by 2021, and 2 per cent over the medium term.

The government has said that it will not introduce any new taxes in the 2020 budget, but it could expand the coverage of existing taxes to broaden its revenue base, according to Maybank Investment Bank.

Dr Mahathir's government had abolished an unpopular consumption tax last year as part of an election pledge, but offset the loss in revenue by reintroducing a sales and services tax, raising tax payouts from gambling and the sale of privately owned properties, and introducing new taxes on sugar consumption and airport use.

REUTERS

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A version of this article appeared in the print edition of The Straits Times on October 08, 2019, with the headline KL set to expand budget amid weak economic outlook. Subscribe