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Malaysia in transition

Mahathir floats new taxes and asset sales to restore confidence

Malaysia PM promises investors fiscal stability but warns of need to 'sacrifice'

KUALA LUMPUR -- Malaysian Prime Minister Mahathir Mohamad on Tuesday floated the idea of introducing new taxes and selling state assets in a bid to reduce national debt and restore investor confidence.

The World Bank has recently cut Malaysia's economic growth forecast for this year to 4.9% from 5.4%, citing concerns over the country's prospects amid lower spending and high debt levels.

While addressing a government-hosted conference, Mahathir said his administration would prioritize repaying debts and restoring "damaged government machinery," while trying to attract foreign direct investment.

"We have to devise new taxes in order to have the money to pay our debts," Mahathir told a gathering of some 2,000 members of the business community in the Malaysian capital. "Of course the other thing we can do is to sell our assets."

The 93-year-old leader stated that government land could be put up for sale, but stressed that local investors would be targeted, in contrast to his predecessor Najib Razak, whom he accused of selling land to foreigners to build high-end properties that were beyond the reach of many Malaysians.

The prime minister did not elaborate on the type of taxes he envisioned, but local reports have suggested that the government could bring back inheritance tax and introduce a levy on carbonated drinks.

Mahathir, who assumed power in May for the second time in a political career spanning over six decades, blamed Najib for over-borrowing to grow the economy, which from the gross domestic product aspect appeared "all right" but in reality burdened the population with a high cost of living.

"This will be tough for the government because we've inherited a country that had [become] completely disoriented," said Mahathir, referring to the lack of accountability of the previous administration in managing the country's finances.

The government has revealed national debt, including government guarantees and lease payments, had increased to 1,087 trillion ringgit ($262 billion), or 80.3% of GDP, by the end of 2017.

Mahathir insisted that the country could recover with the help of foreign investors, based on Malaysia's experience of weathering the Asian financial crisis in the mid-1990s.

"This country will grow and grow to become yet another tiger," said Mahathir, referring to the economies of Hong Kong, Singapore, South Korea and Taiwan, known in the 1990s as the "Asian Tigers" due to their rapid industrialization.

Had it not been for the financial crisis, Malaysia may well have joined the group during Mahathir's first stint in power.

But unlike during the 1990s, when growth was fueled largely by commodity exports and investment in the equity market amid widespread privatizations, Malaysia has in recent years relied on infrastructure spending as foreign direct investment and exports have decreased.

The Mahathir government's cancellation of 76.18 billion ringgit worth of China-backed projects and 15.22 billion ringgit of spending on subway-related projects has shaken investor confidence.

As of Oct. 5, foreign net outflow from the country's equity market stood at 8.6 billion ringgit so far this year, offsetting the 10.3 billion ringgit of inflow during 2017, according to MIDF Research.

Gross exports declined unexpectedly by 0.3% year on year in August, weighed down by lower shipments of commodities and manufactured goods, ensuring the country logged its lowest trade surplus growth since October 2014.

"Our channel checks suggest that limited excess capacity and lingering policy uncertainties have deterred some Malaysian companies from receiving higher orders resulting from the U.S.-China trade disputes," wrote Singapore's United Overseas Bank in a recent research report.

The current account growth decline comes amid a projected loss of 23 billion ringgit in annual government revenue due to the repeal of the unpopular goods and services tax. The previous government set a fiscal deficit target at 2.8% of GDP for 2018, but the new administration has deemed this goal "unrealistic."

The government is expected to unveil its fiscal budget for 2019 in Nov. 2, and has warned of a tough period ahead.

"The budget is of sacrifice, everyone will have to sacrifice and we have to accept that we must sacrifice," Finance Minister Lim Guan Eng told the conference, quoting Mahathir.

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