Malaysia Plans Projects-to-Subsidy Curbs to Contain Budget Gap

Malaysia Plans Projects-to-Subsidy Curbs to Contain Budget Gap

Malaysia said it plans to delay infrastructure projects, cut subsidies and may start a consumption tax, seeking to contain the budget deficit and bolster a shrinking current-account surplus. Public building projects with high import content are most likely to be rescheduled, Idris Jala, a minister in the Prime Minister’s Department, told reporters in Kuala Lumpur today. The government may unveil plans to adjust subsidies as early as next week and is trying to include a goods and services tax in its 2014 budget, said Mohd Irwan Serigar Abdullah, secretary general at the finance ministry.Asia’s policy makers are working to regain investor confidence as the prospect that the U.S. will reduce stimulus spurs outflows from the region, with Indonesia’s central bank holding an unscheduled board meeting today. The ringgit has fallen 7.9 percent this year, and Fitch Ratings cut Malaysia’s rating outlook to negative last month, citing the Southeast Asian nation’s rising debt levels and lack of budgetary reform.

“The market expects us to manage our deficit and balance of payments in a way to ensure the market will have confidence in the macro and fiscal management of this country,” Prime Minister Najib Razak told reporters in Putrajaya, outside Kuala Lumpur. “The details relating to that will be announced when appropriate.”

The benchmark FTSE Bursa Malaysia KLCI Index has fallen 5.9 percent from a record on July 24.

Construction of a subway in Kuala Lumpur, the country’s biggest infrastructure project, won’t be among those projects held up, said Jala, who heads the government’s Performance Management & Delivery Unit.

Rebates, Exemptions

Dialogues on the implementation of a goods and services tax have been underway, said Najib, who is also finance minister. “Whether this is included in the budget or not, we’ll have to wait for the budget,” said the premier, who is due to deliver his 2014 fiscal plans on Oct. 25.

GST would take 14 months from next year to implement if the government goes ahead, Irwan said. To ease the public’s burden, rebates would be given to some people and smaller companies, and some essential items like rice and baby milk could be zero-rated, he said.

A consumption tax is “a must not an option,” said Irwan. “We are trying our best to include it in this year’s budget.”

Malaysia is on target to lower its budget deficit to 4 percent of gross domestic product this year and to 3 percent in 2015, Irwan said. It aims to achieve a surplus in 2020, he said.

“The steps announced are reassuring and will help calm fears about the large fiscal deficit and debt, and worsening current-account position,” Chua Hak Bin, a Singapore-based economist at Bank of America Corp., said by e-mail. “What will probably help are also steps to address ballooning government spending and operational costs, and not just tax increases.”

Current Account

The current-account surplus fell to 2.6 billion ringgit ($784 million) last quarter from 8.7 billion ringgit in the previous three months as exports slumped, a decline that could pressure the ringgit.

Moody’s Investors Service said in a report this month the country had a “narrow” revenue base and “relatively high” government deficits, state subsidy bills and debt.

The government spent 24 billion ringgit last year on fuel subsidies for consumers and industries, Abdul Wahid Omar, minister in the Prime Minister’s Department in charge of economic planning, said in an Aug. 20 interview. He called this “not sustainable.” It also ensured some food items were available below market price.

To contact the reporters on this story: Manirajan Ramasamy in Kuala Lumpur at rmanirajan@bloomberg.net; Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net