Economists see subsidy cut as nod to deficit, even as Fitch seeks more

KUALA LUMPUR, Sept 4 — Putrajaya’s cut in fuel subsidies yesterday signalled that it is rolling back on spending to address the chronic budget deficit, said economic observers even as Fitch Ratings warned that more substantial reforms were needed to avoid a potential ratings downgrade.

Economist Dr Yeah Kim Leng said the fuel subsidy cut is part of the government’s overall reform package — which includes “increasing spending efficiency and cutting back on wasteful spending” — to cut its budget deficit to four per cent this year.

But Yeah said cuts in government spending alone are not enough and that the Najib administration would need to increase its revenue at the same time to lessen the pain.

This view appeared to be echoed by Fitch Ratings yesterday, which said sustained reforms and a broadening of the revenue base through a goods and services tax (GST) were necessary to make a difference to the country’s credit profile.

“With the present initiative, that is signalling that it has commenced fiscal consolidation to strengthen public finances by cutting back on spending which includes subsidies and enhance revenue,” the chief economist of RAM Holdings Bhd told The Malay Mail Online.

Despite the expected cuts in government spending, Yeah remained optimistic that the economy would not suffer too much, pointing to resilient domestic demand and the upward trend of economic growth based on 2013’s second quarter.

Yeah noted that expected higher exports in 2013’s second half from an improving global economy would “help the government to offset the impact of cuts in spending”.

Yeah insisted that the cut in government spending amid Malaysia’s slower economic growth this year was prudent, noting the need for the country to shift to relying more on private spending to boost the economy instead.

“This is seen to be more prudent given that we are becoming more vulnerable because of unsustainable government spending,” he said.

“This will make the economy more resilient, more sustainable growth in the short-term and medium-term and it helps to strengthen market confidence,” he said, agreeing that it would address some of the concerns raised by international ratings agencies.

Fitch Ratings had in July downgraded Malaysia’s “A-” credit outlook from stable to negative, citing lack of reforms and weak public finances.

Rival ratings agencies Standard and Poor’s and Moody’s both have a “stable” rating on Malaysia’s sovereign debt.

Yesterday, another analyst with a leading local bank said the recent cut in fuel subsidies was necessary for the government to reduce its fiscal deficit, saying that the resulting slower economic growth would be the “lesser of two evils”.

“This is part of what they are supposed to do to reduce spending.

“We just got to live with slower growth,” the analyst said, saying that the country would be improving its fundamentals at the same time.

Fitch warned, however, that a hit to the country’s economic expansion could ultimately work against Putrajaya’s efforts to narrow its deficit.

“Slowing growth could also lower tax receipts, making it that much more difficult to achieve the medium-term government deficit target of 3 per cent of GDP by 2015,” it said.

But two other economists disagreed that the fuel subsidy reduction meant that the government was curtailing its spending.

Maybank Investment Bank’s chief economist Suhaimi Ilias said that Putrajaya was not going on a spending cut or taking austerity measures, explaining that the country was not in the midst of a sovereign debt crisis like the euro zone.

He said Malaysia’s focus was more on “restructuring subsidies to a more targeted scheme, [prioritising] projects that have high economic impact and low import contents, as well as better control on government spending.”

“So the net effect should be slower but sustainable spending growth,” he said.

Suhaimi also said the government could still encourage the private sector to pour more money to fuel economic growth.

“In addition, any consolidation in government spending can be offset by measures and incentives to spur private sector spending especially investment.”

CIMB chief economist Lee Heng Guie said that the government was merely resuming its plans to rationalise subsidies, noting that it had previously slashed subsidies a few times before pausing it a few years before the 13th general elections.

“This is just a start... eventually, gradually we will continue to reduce subsidies,” he said.

Lee said there was effectively no cut in government expenditure, as the projects that would be postponed by Putrajaya had yet to start.

“There is a need to defer so that the government deficit is more manageable,” he said, referring to the government’s plan to push back projects with high-import content in order to decrease capital outflows and improve its current account surplus.

Malaysia runs a relatively high government debt of 53 per cent of gross domestic product ― just under the legal ceiling of 55 per cent ― and has one of Asia’s highest household debt levels, at over 80 per cent of GDP.

Eyes are now on the additional measures expected to be taken in the 2014 Budget that Prime Minister Datuk Seri Najib Razak is scheduled to table on October 25.