October 19, 2015 / 9:25 AM / 2 years ago

Malaysia's Najib faces budget test amid oil slump and graft scandal

KUALA LUMPUR (Reuters) - Dogged by scandal and hampered by falling oil and gas revenues, Malaysia’s Prime Minister Najib Razak will present a budget on Friday that will look to shore up economic growth and appease voters unhappy with his leadership and rising living costs.

Malaysia's Prime Minister Najib Razak leaves parliament in Kuala Lumpur, Malaysia, October 19, 2015. REUTERS/Olivia Harris

It is unlikely to alter investors’ disillusion with Najib’s Malaysia, reflected by the ringgit currency’s 20 percent drop since the start of the year to levels unseen since the Asian financial crisis in the late 1990s.

While the government would like to show it is business as usual, passage of the budget could test the support Najib commands in the ruling United Malays National Organisation (UMNO) as he fends off corruption allegations over indebted state-fund 1Malaysia Development Bhd (1MDB).

Najib, who is also the finance minister, prepared the ground for a voter-pleasing budget in a blog post last week, saying a state survey found cost of living, housing and education were the most important issues for Malaysians.

“Preservation of household income is important. That is why I am stressing on the people’s economy,” Najib wrote.

Self-preservation is also likely to figure in the equation, analysts say. Opposition lawmakers are pushing this week for a confidence vote in parliament, which Najib would almost certainly survive if it did happen.

But he still needs to convince worried UMNO members that he can come through the multi-billion dollar scandal at 1MDB to lead them into an election due by 2018.

A poll by Merdeka Center, published by the Singapore Straits Times on Saturday, showed support for the government among the country’s ethnic Malay majority had sunk to 31 percent in August from the 52 percent in January. Support among the minorities, notably the Chinese, was even lower.

Making it harder for Najib, Malaysia’s economy is showing signs of slowing after growing 5.3 percent annually in the first half of 2015 and low prices for exports of oil, gas and other commodities have reduced its external surpluses.

While wanting to boost growth and employment, Najib can ill-afford to take risks fiscally, or politically after the introduction of a highly unpopular sales tax on goods and services in April.

HANDOUTS, BONUSES AND NEW ROADS

Singapore-based Nomura economist Brian Tan foresaw no major budget surprises this time.

“There would just be more cash handouts and infrastructure projects,” Tan said. “The more he tries to change, the more is the risk of taking unpopular decisions, which the government wants to avoid.”

The budget is likely to include measures to cushion the impact of new taxes, hikes in road tolls and subsidy cuts on households through cash payouts, bonus payments for civil servants and individual tax relief.

Economists foresee subsidies increasing through a cash handout program for the poor called BR1M. Affordable housing programs could be expedited also.

Other likely measures include more spending on road building, particularly in the politically key Borneo states of Sabah and Sarawak.

The government is already struggling to bring its fiscal deficit down to a targeted 3.2 percent of gross domestic product this year.

Unhelpfully, the dividend received from state oil and gas firm Petronas is expected to be far lower than the committed 26 billion ringgit ($6.18 billion) for 2015.

On the plus side, the new sales tax has raised a more than expected 23.2 billion ringgit since its introduction, deputy finance minister Chua Tee Yong told parliament on Monday.

Despite ringgit’s slump, international credit rating agencies have kept Malaysia’s sovereign debt at investment grade and all of them have a “stable” outlook for the rating. But room for stimulus remains limited.

“The government has to consider the trade off between maintaining fiscal consolidation mentioned in the new five-year plan and maintaining near term support for this economy,” said Christian de Guzman, Moody’s analyst, referring to the 11th Malaysia Plan unveiled in May.

Editing by Simon Cameron-Moore

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