Malaysia Stresses No Need to Panic While Cutting Forecast

By Chong Pooi Koon and Manirajan Ramasamy 

Photographer: Goh Seng Chong/Bloomberg

Najib Razak, Malaysia's Prime Minister.

Malaysia’s policy makers sought to reassure investors the economy can withstand an oil-price slump that forced the crude-producing nation to trim its growth forecast and change its budget deficit target. The ringgit fell.
The Southeast Asian nation’s economy isn’t in crisis, Prime Minister Najib Razak said in a speech in the administrative capital of Putrajaya today. Najib, also finance minister, said the 2015 budget gap will be 3.2 percent of gross domestic product, bigger than an October target of 3 percent, and growth will be 4.5 percent to 5.5 percent from an earlier projection of as much as 6 percent.
Crude prices at half the level of a year ago has increased pressure on Najib to accelerate the restructuring of an economy grappling with rising costs and elevated household debt. While declining investor confidence has pushed the currency to its weakest level since 2009, officials said t
oday the country isn’t in need of fiscal or monetary stimulus and Malaysia won’t face an exodus of funds.
“We are taking preemptive measures following the changes in the external global economic landscape which is beyond our control,” said Najib, 61. “This necessitates us to review and clarify some of our earlier macro and fiscal assumptions.”
The currency fell 1 percent to 3.6075 a dollar in Kuala Lumpur Tuesday, adding to a 0.4 percent loss a day earlier, according to data compiled by Bloomberg. It fell as much as 1.2 percent earlier in the day to the lowest since April 2009.

Selling Pressure

“The ringgit is still weak because the market is reacting to the higher fiscal deficit for this year and lower GDP growth forecast,” said Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group Ltd. “The ringgit is seeing selling pressure and could weaken further in the near term.”
Fitch Ratings, which has a negative outlook on the Malaysian sovereign, said today the revised budget and growth figures reinforce that dependence on commodities remains a key credit weakness for the country. The negative outlook indicates it is “more likely than not” to downgrade the rating, which Fitch expects to review in the first half.
“The credit profile remains vulnerable to sharp movements in commodity prices,” it said. “Further measures might be required to meet the fiscal consolidation target of achieving a balanced budget by 2020.”

Energy Dependence

Oil-related contributions make up almost 30 percent of Malaysia’s annual state revenue. The government today lowered its 2015 oil-price assumption to $55 a barrel from $100 previously. Najib sought to downplay the importance of energy exports to the economy, saying Malaysia is a net importer of crude and petroleum products if liquefied natural gas shipments are excluded.
“We still see the government missing its 2015 fiscal deficit target,” said Singapore-based Chua Hak Bin, an economist at Bank of America Merrill Lynch. “We think that the government’s estimates are on the optimistic side.”
Policy makers across Europe and Asia are trying to come up with new ways to stimulate demand as the world economy falters, with the International Monetary Fund making the steepest cut to its global-growth outlook in three years in its quarterly report released late Jan. 19 in Washington.

Accommodative Rates

Malaysia’s central bank held borrowing costs in the two most recent policy meetings after becoming the first in Southeast Asia to raise its benchmark interest rate in 2014. Governor Zeti Akhtar Aziz has said monetary policy needs to remain accommodative to support expansion, even as the central bank predicts inflation this year will accelerate to the fastest since 2008.
“From time to time, we will review our interest rates,” Zeti told reporters in Putrajaya today. “But, at this moment, the rates are highly accommodative for growth” even amid challenging times “and we are in a very strong position, with steady growth,” she said.
While the economy grew 6.1 percent in the first three quarters of 2014 from a year earlier, rising costs are threatening to undermine private consumption and capital expenditure. Najib’s efforts to narrow the budget deficit include a goods and services tax of 6 percent that will start April 1.
The government will postpone tariff increases for electricity and gas to reduce the burden for businesses, Najib said today.

Expenditure Cuts

It will continue with fiscal reforms and consolidation even as lower oil prices cut revenue available for development spending, Najib said. Malaysia will reduce its 2015 operating expenditure by 5.5 billion ringgit while maintaining the allocation for development, he said.
While Malaysia’s revised budget is an indication of the government’s continued focus on fiscal consolidation, a prolonged slump in crude prices could derail efforts, according to Standard & Poor’s.
“The risks are that the contracting oil and gas sector could affect activities in other sectors to bring down overall economic growth,” Associate Director of Sovereign Ratings YeeFarn Phua said in an e-mailed statement. “For 2015, it could put at risk the authorities’ revised 2015 GDP forecast of 4.5 percent to 5.5 percent, especially if growth of domestic consumption and investment also weaken.”
Without any steps to reduce spending, the budget deficit for 2015 would have been about 3.9 percent of GDP, Najib said. Malaysia targets a balanced budget by 2020.

Monsoon Rains

“We will not compromise on national development planning as it will enhance productive capacity of the economy,” Najib said.
Annual monsoon rains that hit the east coast of Peninsular Malaysia spawned the worst floods in decades, and damage to infrastructure is estimated at about 2.9 billion ringgit, Najib said. The government will provide 800 million ringgit for repair and reconstruction of schools, hospitals, roads and bridges, and 893 million ringgit under the 2015 budget for flood mitigation projects, he said.