KUALA LUMPUR: Malaysia's government on Friday (Oct 11) unveiled a smaller budget than expected for next year but flagged a wider budget deficit than earlier estimates and said it would step in with stimulus measures should global demand worsen.
Southeast Asia's third-largest economy bucked a global cooling trend and grew faster than expected in the first half of 2019, but analysts say the US-China trade dispute and expanding protectionist policies around the world will eventually drag on the export-reliant country.
Nevertheless, Prime Minister Mahathir Mohamad's government, forecast economic growth of 4.8 per cent next year, slightly higher than this year's projected 4.7 per cent, and pencilled in a very modest improvement in exports.
"In the event of continued worse-than-expected external environment, the government stands ready to step in with contingency measures to provide further support or stimulus to growth," Finance Minister Lim Guan Eng said in a two-and-half-hour-long budget speech in parliament.
As expected, the government projected a fiscal deficit of 3.2 per cent of gross domestic product (GDP), larger than an initial target of 3 per cent but lower than this year's 3.4 per cent, citing a heightened risk of a global economic slowdown and unanticipated spending needed to rescue troubled state institutions.
Lim had said earlier it would be a "challenge" to meet its earlier deficit target for 2020.
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Standard Chartered Bank, which had correctly forecast next year's deficit figure, said this week that the widening was not expected to raise credit rating concerns given the state of the global economy, as long as the government adhered to its medium-term fiscal consolidation target.
The government expects the fiscal deficit to average 2.8 per cent over the medium term.
Malaysia's stock market ended higher on Friday as Lim continued his speech.
INCENTIVES FOR INVESTMENT
Malaysia will also provide tax exemptions to promote high-value added activities in its massive electrical and electronics industry, as it looks to attract companies which are moving operations from China due to the escalating tariff battle.
New incentives for foreign investment will be finalised by Jan 1. The government will also extend up to 1 billion worth of customised incentives annually over five years, as part of push to attract Fortune 500 companies and promising newcomers in high technology, manufacturing and other industries.
The government budgeted RM297.02 billion (US$70.85 billion) in spending for 2020, 6 per cent lower than the RM316 billion earmarked for this year.
Analysts had expected the government to unveil an expanded budget overall, but it is grappling with a RM1 trillion debt pile left behind by its predecessors and declining revenue.
Revenue is forecast at RM244.53 billion in 2020, down 7.1 per cent from this year's projection. Unlike this year, there will be no repeat of a RM30 billion one-off payout to the government by state energy firm Petronas.
However, Lim ruled out reintroducing a goods and services tax (GST) that was repealed last year.
The government's operating budget will drop sharply to RM241.02 billion next year from RM262.26 billion allocated for this year.
But development spending will expand to RM56 billion from RM53.7 billion in 2019, to fund the government's plan to boost economic activity, invest in education and training, and "revitalise public institutions and public finances".
In an accompanying fiscal outlook report, the government said it would also set aside an additional RM3 billion to speed up ongoing major infrastructure projects.
MODEST GROWTH OUTLOOK
The government said the economy is expected to growth in the range of 4.5 per cent to 5 per cent over 2020-2022.
Domestic demand is expected to rise 4 per cent this year and 4.8 per cent next year, supported by a stable labour market and low prices.
The government expects private sector activity to continue to prop up the economy. The services sector, which accounts for about 58 per cent of GDP, is forecast to grow 6.1 per cent in 2019 and 6.2 per cent next year.
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Policymakers expect petroleum-related revenue to fall 1.4 per cent to RM50.5 billion in 2020, based on an assumed average global crude oil price of US$62 per barrel.
Gross exports are estimated to expand by 0.1 per cent in 2019 and 1 per cent the following year.
The current account surplus is likely to widen to RM43.4 billion in 2019 on an increase in net exports of goods and services. However, projected weakness in global and domestic demand and commodity prices are expected to slash that figure to RM29 billion in 2020.