Prime Minister Najib Abdul Razak is expected to put a raft of populist measures into the 2017 Budget he will unveil on Friday, in a bid to assuage voters unhappy with his leadership and rising living costs.
The budget will be Najib’s best opportunity to shore up support before a possible early general election, but any widening of the fiscal deficit at a time the economy is cooling could risk downgrades to Malaysia’s sovereign rating.
Growth has slowed in each of the last five quarters, reaching four percent in April-June as poor oil prices have squeezed Southeast Asia’s third largest economy. The government’s current 2016 full-year forecast is 4.0-4.5 percent.
Public debt as a percentage of gross domestic product is just short of Malaysia’s 55 percent ceiling, rising from 43 percent in 2008. Its budget deficit was 5.6 percent of GDP in January-June, far above the year’s 3.1 percent target.
Najib has battled urgings to step down over a scandal involving the 1Malaysia Development Bhd (1MDB) scandal, removed critics from his administration and consolidated support in a state election and two by-elections this year.
The past year has been turbulent for Najib as 1MDB became the centre of a civil suit filed by US prosecutors. The fund is linked to investigations in at least six countries, including Switzerland and Singapore. Najib has denied any wrongdoing.
Voters and goodies
An election can wait until August 2018, but Najib - who will face his toughest poll test - may call one in the second half of 2017, a government official said.
Wellian Wiranto, economist for OCBC in Singapore, said the coming budget could be “more crucial” than previous ones.
“People always remember the last goodies they have, and the more goodies you can deliver to the political vote bank, the better,” Wiranto added.
Populist measures have been a theme of Malaysian budgets since Najib became prime minister in 2009. The focus has been on cash aid to low-income families and development projects for rural regions where the ruling BN coalition gleans a large chunk of votes.
In the budget, Najib is likely to stick to his past formula, driven “more by political calculations”, Wiranto said. “It’s a matter of ‘what can we do to be popular enough’.”
But the extent of government largesse will be constrained by Malaysia’s need to contain its budget deficit.
“Deterioration in fiscal discipline and broader public finances leading to higher government debt and deficit levels could be negative,” Fitch said in a statement to Reuters.
More of the same
Most analysts don't see much room for Najib to spend heavily as revenue from natural gas and oil Malaysia has been hurt by low global prices.
The sharp dive in global crude prices made state oil firm Petronas slash its dividend payout to the government to RM16 billion this year, from last year’s RM26 billion.
Najib, who is also the finance minister, hinted at constraints last week, telling the state news agency Bernama: “There are so many things that we need to do but one has to realise that it has to be in the context of our affordability and also that we need to rein in, or at least manage our debt and fiscal deficit in a prudent way.”
Asset management firm Affin Hwang expects Najib to increase annual handouts to poor households, to possibly make tax cuts for the middle-class and to keep the goods and services tax rate at six percent.
Public housing is also expected to figure prominently in the new budget, which could allow first-time house buyers to access more of their pension funds to buy property.
Analysts also expect Najib to announce that the corporate tax rate, now 24 percent, will be cut by one percentage point in 2018.