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Malaysia Targets 6% Growth As Inflation Seen Curbing Spending
Perspective | 16 October 2014

Malaysia raised its growth forecast for 2014 and predicts government expenditure will support the expansion next year as subsidy cuts and a new consumption tax curb private spending.

Gross domestic product (GDP) will increase 5.5 percent to 6 percent this year, and between 5 percent and 6 percent in 2015, the Ministry of Finance said in its 2014/2015 economic report on 10 October as Prime Minister Najib Razak unveils the annual budget. The central bank projected 2014 growth of 4.5 percent to 5.5 percent in March.

Najib’s efforts to narrow Malaysia’s budget deficit through subsidy cuts have left companies and consumers grappling with higher costs, and inflation next year is forecast to be the fastest since 2008. The government will increase handouts to lower-income households to help them cope with the goods and services tax (GST) starting in April, while boosting public spending on infrastructure.

Consumer prices are forecast to rise 4 percent to 5 percent in 2015, compared with an average 3.3 percent in the first eight months of this year, the report showed.

Manageable Inflation

“Inflation is expected to remain manageable despite trending above the long-term average,” according to the report. “The strong capacity expansion over the past years will help to mitigate the cost pressures, while a more cautious stance of consumers would also contribute to moderating demand and hence prevent inflation from becoming more entrenched.”

Malaysia narrowed the budget shortfall to 3.9 percent of gross domestic product in 2013, and Najib said he is “committed” to further trimming the gap to 3.5 percent this year and 3 percent in 2015, heading toward a balanced budget by 2020.

“To ensure that public financial management remains sound, the government will continue to focus on its fiscal transformation agenda,” Najib said in the report. “The strategies encompass ensuring effective and efficient government spending, broadening the tax base including implementing GST as well as improving the subsidy targeting mechanism.”

The ringgit advanced by the most in six months on 9 October, amid optimism Malaysia’s budget will outline commitments to improve public finances. The government will “ensure” its debt level is capped below 55 percent of GDP.

Higher Spending

Najib’s administration is forecasting federal spending of RM271.9 billion (US$84 billion) in 2015, according to the finance ministry’s report. Total expenditure for this year is estimated at RM262.2 billion.

The central bank kept its benchmark interest rate unchanged last month after an increase in July and said it will assess the balance of risks between the outlook for growth and inflation when considering further policy moves.

“In 2015, monetary policy measures will continue to support growth while mitigating risks to economic and financial imbalances that could undermine the long-term growth prospects,” according to the report.

Malaysia raised fuel prices for the first time in more than a year on 2 October, and Najib’s administration has pledged to continue providing cash handouts to the lower-income group and extend various assistance programs to the needy, including affordable housing.

“The government is concerned with the difficulties faced by the rakyat in coping with the rising cost of living,” Najib said in the economic report, using the local term for citizens. “We will intensify efforts to ease the burden.”

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