Malaysia Deficit Swells as Abdullah Triples Subsidies

Aug. 29 (Bloomberg) -- Malaysia will post its biggest budget deficit since 2003 as embattled Prime Minister Abdullah Ahmad Badawi triples subsidies on food and fuel to bolster support amid accelerating inflation and slowing growth.

The government's 2008 budget shortfall will reach 34.5 billion ringgit ($10.2 billion), or 4.8 percent of gross domestic product, the Ministry of Finance said in a report today. Economic growth is forecast to ease to 5.7 percent this year and 5.4 percent in 2009, the weakest pace since 2005, it said.

``Growth in the second half is expected to moderate following the slower external sector as well as the pass-through effects of the higher pump prices of petrol and diesel,'' Abdullah said in the report. ``Higher fuel prices along with other price increases will reduce net disposable income and affect consumption.''

Abdullah, 68, is facing renewed calls from within his own ruling National Front coalition to quit after opposition leader Anwar Ibrahim this week won a by-election, furthering his plan to capitalize on the Front's worst election performance in half a century in March and oust the government.

``The 2009 budget lines up the most populist measures in history for the current administration to appear people- centric,'' said Azrul Azwar Ahmad Tajudin, an economist at Bank Islam Malaysia Bhd. ``Anwar is staring Abdullah down.''

`Face the Music'
Voter anger over rising prices contributed to opposition gains in the March vote that deprived Abdullah's ruling coalition of its two-thirds majority in parliament. Malaysia's inflation accelerated to a 26-year high of 8.5 percent last month after the government raised fuel prices to keep down its subsidy costs as crude surged.

``It is time to face the music,'' said Tengku Razaleigh Hamzah, a coalition lawmaker and former finance minister who demanded Abdullah quit in April. The premier ``does not have the minimal credibility needed to run the country day by day, let alone take it in the new directions we need.''

By December, Abdullah won't be in charge, Razaleigh said Aug. 27, the day after Anwar's by-election victory.

Malaysia's economy, the third-largest in Southeast Asia, expanded 6.3 percent in the second quarter from a year earlier following a 7.1 percent gain in the previous three months, the central bank said in a separate report today. That was more than the 6 percent expected by economists in a Bloomberg News survey.

Fuel Subsidies
Governments across Asia have had to spend more on subsidies to help the poor cope with record oil and food costs this year. Inflation that the Asian Development Bank estimates may reach a decade high in 2008 has stoked voter unrest in the region.

In response to public discontent over costlier fuel, Abdullah last week cut gasoline prices by 5.6 percent and lowered diesel costs by 3.1 percent, saying he wants to ease the burden of consumers and reduce inflationary pressure. The government will also spend 5 billion ringgit on cash rebates to car owners this year, is subsidizing gasoline for taxis and has allocated 2.5 billion ringgit for food security.

Malaysia's government subsidies on bread, cooking oil, fuel and programs to enhance food security will jump to 34.1 billion ringgit this year and total 33.8 billion ringgit in 2009, according to the report. Still, the ministry expects the budget deficit to narrow to 3.6 percent of GDP next year.

Inflation in Malaysia will remain high until early 2009 before ``moderating towards mid-year,'' according to today's report. The government will introduce new measures to boost its social assistance program, it said.

Cash Handouts
Abdullah may propose income tax reductions, lower employee contributions to the national pension fund and cash handouts or rebates to the poor in his budget speech today, according to economists surveyed by Bloomberg News.

Malaysia last cut the top income tax rate to 28 percent from 29 percent in 2002. The government has posted budget deficits since 1998, when it began spending more than it earned to revive an economy hurt by the 1997 Asian financial crisis.

Anwar has said he plans to lure enough lawmakers from the ruling coalition to form a new government next month. The former deputy premier has promised to reduce fuel prices should he seize power.

Stephanie Phang
Bloomberg
30/08/08

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