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Malaysia's budget likely to rely on populist measures to spur economic growth

KUALA LUMPUR (NewsRise) - Malaysia's Prime Minister Najib Razak is expected to announce a slew of populist measures including cash aids to spur consumer spending in a slowing economy when he unveils next year's federal budget on Friday, economists said.

   While Najib is expected to use the budget to win voters ahead of a likely early general election after an alleged funding scandal sullied his political appeal, he has little room to stray from a medium-term fiscal discipline that seeks to balance Malaysia's budget by 2020.

   Najib, who is also the finance minister, has been at the center of swirling allegations that he received hundreds of millions of dollars drawn out of state investment fund 1 Malaysia Development Bhd, which he chairs. Najib has consistently denied any wrongdoing even as 1MDB is now at the center of a civil suit in the U.S. and has been linked to probes in several countries including neighbor Singapore and Switzerland.

  "The budget's aim should be macro stability which infers any expansionary plans should be done with fiscal discipline," said United Overseas Bank economist Julia Goh. "This infers striking a balance between spending priorities and resource constraints."

   Economists said, Najib will use the budget as a key policy tool to help accelerate economic growth amid weak consumer sentiment and boost support among the ethnic Malay population - his traditional political support base and wider recipients of government largesse -as he strives to keep fiscal deficit in check.   

   Economic growth has decelerated for past five consecutive quarters as exports dragged tracking weak global conditions, although domestic demand has largely held up thanks to low unemployment rate.

   A slump in global oil prices from its triple-digit peak in mid-2014 has weighed on Malaysia's growth and government finances. Oil and gas, which accounted for 11% of Malaysia's total exports in 2015, is also a major source of revenue for the government.

   Malaysia's fiscal deficit was 5.6% of the gross domestic product in the first six months of this year, sharply wider than the full year's 3.1% target. Public debt, meanwhile, hovers close to its self-imposed ceiling of 55% of GDP.  

   Fiscal consolidation efforts that have crimped government spending have weighed on the economy that expanded 4.0% year-on-year in the second quarter, its slowest pace in seven years. Furthermore, introduction of a consumption tax and subsidy cuts on essential goods have raised consumer prices.

  "Increased cash handouts to lower-income groups and tax relief for middle-income earners are the most likely kinds of giveaways," Capital Economics wrote in an investor note. The London-based research firm expects Malaysia's budget deficit to narrow to 3.0% of GDP in 2017, from 3.1% this year. 

   While cash handouts could provide a short-term boost to consumer spending, such largesse is unsustainable in the longer-run, said Zakariah Abdul Rashid, an executive director at the government-backed Malaysian Institute of Economic Research.

   Still, the government should unveil an expansionary budget for next year and offer incentives to encourage private investments, Zakariah said. Najib will likely refrain from announcing new construction projects and instead focus on improving infrastructure such as public transportation, he said.

   "We think a lack of fiscal space keeps monetary easing in play and we forecast a final 25 basis point cut in the Bank Negara Malaysia's overnight policy rate to 2.75% by year-end," Tim Condon, head of research at ING Financial Markets wrote in an investor note.

   Bank Negara Malaysia meanwhile has cautioned against relying solely on monetary policy to prop up growth as the central bank grapples with one of the most leveraged households in Asia. Household debt, as a percentage of the economy, ballooned to 89% at the end of 2015 from 87% in 2014.

   That has limited consumers' ability to secure fresh bank loans, hurting sales of big-ticket items such as cars and homes in Malaysia, even as the trade-dependent nation banks on domestic demand to power growth.

    "We see the government continuing to provide further tax cuts and incentives," including extending loan facilities to small- and medium-sized enterprises, said RHB Research Institute. The brokerage arm also expects some personal tax breaks that could help keep more cash in hands of consumers without actually reducing the tax rate.

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