Mar 11th 2009
From the Economist Intelligence Unit ViewsWire
Malaysia's government plans to spend so much that an alarmingly high fiscal deficit will result
On March 10th Malaysia's government unveiled a stimulus programme worth 60bn ringgit (US$16bn). At around 9% of GDP, this is one of the largest fiscal packages relative to GDP to be announced in the region, and it follows a 7bn ringgit package in November last year. The spending outlined in the new package can be divided into four parts: 25bn ringgit in "guaranteed funds" for companies; 15bn ringgit in extra fiscal spending; 10bn ringgit in equity investments; and 10bn ringgit in off-budget projects and other measures. The latter category includes some tax cuts, but there was no reduction in personal or corporate taxes. At least some of the extra fiscal spending will go towards a number of new major infrastructure projects, including new airport terminals. Much of the package is explicitly geared towards shoring up employment; the government pledged to create 163,000 jobs or training positions, including 63,000 government hires.
THE EIU VIEW
As the government's spending priorities suggest, the main aim of the package is to minimise further damage to Malaysia's economy by boosting domestic demand at a time when the crucial export sector has already been battered by twin blows: falling commodity prices and the collapse of demand, particularly for electronics, in developed markets. But if the government's unexpectedly large stimulus package will be welcomed by many, it will also make a major dent in the country's finances. The government expects the extra spending to push the fiscal deficit from 4.8% to 7.6% of GDP in 2009. Given the outlook for the global economy and for international oil prices, these deficit projections look optimistic; the actual deficit is likely to be far higher than the government is willing to admit. Also, the government will have to turn to bond markets for financing, raising concerns that the stimulus could crowd out private-sector investment.
Although Malaysia's economic situation is certainly worrying enough to warrant decisive government action, the timing of the package could reflect political considerations. The new spending was announced by the finance minister, Najib Razak, who is due to take over as prime minister this month, and Mr Najib's United Malays National Organisation will be hoping that the package provides a boost ahead of a series of by-elections in early April.