KUALA LUMPUR, March 9 (Reuters) – Faced with the worst economic conditions since the 1998 Asian financial crisis and mounting political woes, Malaysia’s next prime minister is due to unveil his first budget on Tuesday.
Deputy Prime Minister and Finance Minister Najib Razak is expected to unveil an extra 30 billion ringgit ($8.08 billion) in spending measures to boost domestic demand in this export-dependent Southeast Asian country of 27 million people.
The success of the budget in preventing further job losses is likely to determine whether Najib, the son of the country’s second prime minister, will be the last from a coalition that has ruled Malaysia for 51 years since independence from Britain.
The first test of the budget will come in a parliamentary by-election and three state assembly seat elections on April 7. Failure in these could cast Najib as a lame duck just a week after he becomes prime minister on March 31.
“If he loses them all, everyone will cast it as a referendum on Najib,” said James Chin, professor of politics at the Monash University campus in Kuala Lumpur.
The National Front coalition Najib will lead is still reeling from losing its two-thirds parliamentary majority and control of four of Malaysia’s 13 states in elections a year ago, and now has to deal with the global economic downturn with four years to go until the next polls need to be held.
Malaysia is the third most export-dependent country in Asia after Hong Kong and Singapore relative to the size of its economy, and job losses have been mounting as companies like Western Digital and Japan’s Panasonic have shuttered plants.
Exports in January plunged 28 percent from a year earlier, according to the most recent data available, and the economy grew just 0.1 percent in the fourth quarter of 2008 from a year earlier, its slowest pace in eight years.
Malaysia’s room for action is constrained by the fact that through the boom years for major exports oil and palm oil, and for electronics, it ran larger and larger budget deficits.
The country has grown at an average of 5.4 percent a year in the 10 years since the Asian financial crisis a decade ago. The 2009 budget deficit target of 4.8 percent of gross domestic product was based on economic growth of 3.5 percent in 2009.
Now most private sector economists see an outright recession, the first since 2001. Najib will release the new forecasts on Tuesday with the supplementary budget.
The large deficits will constrain Malaysia’s ability to borrow and ratings agencies have already warned additional spending would lead to a credit downgrade, a move that would make it more expensive to borrow overseas.
“Despite the size of the government’s fiscal deficit, the intensity of the downturn could likely prompt a package to the tune of 30 billion ringgit, although this may not necessarily be disbursed within a year,” Citibank economist Wei Zheng Kit wrote in a report issued last week.
Citibank calculations show that if Najib spent an extra 30 billion ringgit, the budget deficit would surge to 9.6 percent of gross domestic product which would require bond issues worth 107 billion ringgit versus 61.2 billion in 2008.
The budget has also been touted as a time for Najib to unveil economic reforms to liberalise the services sector for foreign investment, but it is unlikely there will be broader reforms such as dismantling Malaysia’s race-based economic system.
Malays, Najib’s core voter base, account for 60 percent of the population and have a system of economic privileges designed to help them catch up with richer Chinese businessmen.
“It (the budget) will be consolidating his own political base and to show the people in opposition-held states that he is prime minister,” said Chin at Monash.
($1=3.715 ringgit) (Reporting by David Chance; Editing by Jerry Norton)
Source : Reuters