Malaysia narrows budget gap
Bloomberg News
March 22, 2005
Stephanie Phang and Chan Tien Hin 

The Malaysian budget deficit narrowed at a faster-than-expected pace last year, a minister said, citing stronger economic growth, the sale of government assets and reduced spending on infrastructure.
 
The budget deficit narrowed to 4.3 percent of gross domestic product, better than a September forecast of 4.5 percent, Nor Mohamed Yakcop, the second finance minister, said in an interview last week.
 
The central bank is scheduled to release details of the budget deficit on Wednesday.
 
Since taking office in October 2003, Prime Minister Abdullah Ahmad Badawi has sold stakes in Telekom Malaysia, Tenaga Nasional and Commerce Asset-Holding, and shelved a $3.8 billion railway project.
 
In his September budget, Abdullah pledged to cut the country's 2005 deficit to a six-year low of 17.7 billion ringgit, or $4.7 billion, equivalent to 3.8 percent of gross domestic product.
 
"This government does look more serious now about making some progress in reducing the fiscal deficit," said Brian Coulton, a Hong Kong-based senior director of Fitch Ratings, which raised its credit rating on Malaysia to A- on Nov. 8. "Fiscal policy intentions have improved, and that's been part of improving the credit outlook for Malaysia."
 
Fitch is not planning to raise Malaysia's ratings further until the government shows that it can reduce its deficit faster than it is forecasting, Coulton said.
 
Moody's Investors Service cited the country's deficit-reduction efforts when it raised Malaysia's credit ratings in December.
 
In September, the government raised taxes on cigarettes and alcohol and forecast a cut in development spending, which includes money for roads, schools and other infrastructure.
 
"We are on this phase of fiscal consolidation and yet growth is good," Nor said. Malaysia's $118 billion economy expanded 7.1 percent last year, the fastest pace in four years.
 
"You have to keep your house in order and in balance" said Goh Han Hau, a fund manager at Allianz General Insurance Malaysia. "The key thing is making sure the economy is resilient."
 
Malaysia is still expected to remain in deficit this year, the eighth year since the 1997 Asian financial crisis reduced tax revenue and forced former Prime Minister Mahathir bin Mohamad to embark on a spending program aimed at lifting the economy out of a slump.
 
Abdullah's measures are "definitely working. We have to consolidate after the acceleration of spending on big projects," said Joe Wong, a fund manager at Easset Management in Kuala Lumpur.
 
Still, Nor said that rising oil prices would be a challenge for Malaysia, which raised the price of diesel by 6 percent this month, the third increase in a year.
 
"If the oil price affects the world, and the growth in the world slows down, of course we have to worry about that, too," Nor said.
 
"Immediately, the first-round effect is not bad for us, because as an oil-exporting country, our revenue will go up," Nor said. "But we are worried about the second-round effect, because that could affect the growth of Europe, Japan and the U.S., and if there is a recession, or slowdown, then the demand for our products will go down and that could be negative."

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