Will Najib bite bullet to boost economy?

WHEN Prime Minister Najib Razak, wearing his Finance Minister's hat, presented the 2014 Budget on Thursday, the big question was whether he will lead Malaysia to finally bite the bullet to strengthen the economy.

He needs to show that Malaysia is willing to heed calls by anxious investors to take serious steps to reduce the budget deficit running for 15 years now.

He must also announce steps to cut public debt, now at 53 per cent of gross domestic product (GDP), just a touch below the government's self-imposed limit of 55 per cent.

And this comes at a time when economists are concerned about Malaysia's shrinking current account surplus due to slower exports.

"Stronger public-sector finance has strategic long-term significance. It will lead to stability in international sovereign ratings, even an upgrade, and this will instil global confidence in the economy," said Mr Zulkifli Hamzah, research head at MIDF Amanah Investment Bank.

Datuk Seri Najib really has no more reason to hem and haw. His ruling coalition won in the May general election and his allies notched victories in recent Umno elections.

"The government will do what is right for our economy. Some measures may not be popular now but over the medium term, what is good for the economy is also good for the people," Mr Najib said in a statement yesterday evening.

Last year, the budget deficit was RM42 billion (S$16.4 billion), with fuel subsidies alone totalling some RM24 billion a year.

To raise revenue, the government is widely expected to offer details on how it plans to introduce a broad-based goods and services tax (GST) in 2015.

A recent report by DBS said that by imposing 4 per cent GST - as speculated by some - the government would raise RM20.5 billion a year in extra revenue.

The GST will broaden the tax base from what it is today, where only 1.7 million Malaysians pay income tax out of its 29 million population.

The GST will also replace the 16 per cent sales and services tax now levied on certain goods and services such as food and beverages in restaurants and hotel services.

And the Najib administration must announce steps to rein in government spending such as deferring mega projects that do not add to its productive capacity, and continue to cut subsidies that have become political crutches such as those for fuel and cooking gas.

At the end of last year, government debt stood at nearly RM500 billion.

Analysts say PM Najib has room to make some tough moves as the economy is expected to grow 4.5 to 5.5 per cent this year and the next, the inflation rate is tame and unemployment is low.

Still, it would not be easy for him to restructure the economy - a major goal since taking over as prime minister in April 2009.

There is public unhappiness over surging home prices, which many salarymen can no longer afford.

Meanwhile, the government's 20-sen hike in fuel prices last month has pushed up food prices.

And then there is an energised opposition breathing down his neck.

Mr Najib is expected to announce several measures to temper prices in the property market, a sector that affects every urban dweller.

"We expect some property measures, both to raise revenue and to cool the housing market," said Mr Chua Hak Bin, head of emerging Asian economics at Bank of America Merrill Lynch.

He said the government might raise the property gains tax or stamp duties, and tighten loan-to-value ratios.

Financial markets are betting that Malaysia is indeed willing to swallow the bitter pill to strengthen its economic legs.

Its stock market closed yesterday at a record high of 1,818.93 points, bond yields are at a three-month low, and the ringgit is trading at a four-month high against the US dollar.

Failure to meet these positive expectations would lead to severe punishment by the markets and ratings companies.

"We cannot control what happens abroad," Mr Najib said yesterday. "But we can work to strengthen the domestic resilience of our economy."

reme@sph.com.sg

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