KUALA LUMPUR, Feb 13 ― Malaysia trimmed its fiscal deficit to 3.9 per cent of gross domestic product last year, after cutting government spending and state subsidies to avert a credit-rating downgrade.

Prime Minister Najib Razak narrowed the shortfall from 4.5 per cent of GDP in 2012, beating the government’s 4 per cent deficit target for last year, according to data released on the central bank’s website. Malaysia wants to further reduce the budget gap to 3.5 per cent this year and achieve a balanced budget by the end of this decade.

Fitch Ratings lowered its outlook on Malaysia to negative from stable in July, citing public finances as the country’s “key rating weakness.” Najib cut subsidies on essential items including fuel and sugar, trimmed ministers’ entertainment budgets and froze proposals to renovate government offices.

“The timely implementation of fiscal and structural reforms will boost investors’ confidence and enhance private-sector investment,” Lee Heng Guie, an economist at CIMB Group Holdings Bhd., said in a report today. “We believe the government is on track to meet its fiscal-deficit targets.”

Malaysia’s economy expanded at the fastest pace in four quarters in the three months ended December as a recovery in advanced nations including the US boosted demand for the country’s goods. GDP climbed 5.1 per cent in the period from a year earlier, the central bank said yesterday.

The ringgit fell 0.1 per cent to 3.3244 against the dollar as of 9.48am in Kuala Lumpur, its first drop in three days, according to data compiled by Bloomberg. The risk of capital flight has weakened emerging-market currencies as the US Federal Reserve pares stimulus.

Interest rates

Rebounding exports have countered Najib’s spending squeeze. Inflation risks are rising following subsidy cuts and the central bank may be moving closer to an interest-rate increase after keeping borrowing costs unchanged since mid-2011, according to Barclays Plc.

Inflation accelerated to 3.2 per cent in December, the fastest pace in two years. Overseas shipments picked up in the second half of 2013, after a “lacklustre” first six months of the year, the trade ministry said last week. Southeast Asia’s third-largest economy is projected by the government to expand 5 per cent to 5.5 per cent in 2014. ― Bloomberg