Government has room to boost spending with higher revenue

(Published in the Star Biz 16th December 2011: page 7)

More pump-priming ahead?

PETALING JAYA: The Malaysian Government will likely pump more money into the economy in the coming months to induce a feel-good factor among the people ahead of the next general election that is expected to be held soon.

“With revenue coming in much higher than budgeted this year as well as the backloading of the planned expenditure, the Government has room to boost spending in the next few quarters,” Credit Suisse Group wrote in its report.

The Government spent RM154bil in the first three quarters of the year. Its revised Budget 2011 suggested that it planned to spend a further RM76.8bil, or 9% of gross domestic product (GDP) in the fourth quarter, which represented a 20% increase from the amount it spent in the corresponding period last year, the international financial services group highlighted.

In Budget 2012, the Government announced one-off cash transfers to the poor, bonus payments and pay rises for civil servants, as well as various tax exemptions. Most of these measures were scheduled to happen in early 2012, which should then provide a boost to sentiment and private consumption.

“The people friendly' budget suggests that the general election, which needs to be held by March 2013, may be near. We expect the Government to continue to pump-prime the economy before the general election,” Credit Suisse explained, adding that it believed the result of the general election would determine the prospects for the much-needed structural reforms, such as subsidy rationalisation and the introduction of goods and services tax, going forward.

On its outlook for Malaysia's economy, Credit Suisse said it maintained its forecast of a 4.8% GDP growth in 2012.

It said, nevertheless, there could be an upside chance to its GDP growth forecast of 4.6% for Malaysia this year, given the still-robust private consumption, partly due to high palm oil prices and government spending that could boost sentiment.

“Malaysia remains highly exposed to a sharp slowdown in the developed world; but, on a relative basis, we think its domestic demand will hold up better than that of the other small open economies in the region,” Credit Suisse said, adding that it expected the country's monetary policy to remain defensive.

“With risks surrounding the eurozone remaining high and inflation likely to fall below 3% year-on-year (y-o-y) in the first quarter of next year, we think Bank Negara will remain data-dependent and be ready to cut the policy rate if needed.

“Our forecast suggests Bank Negara will keep the policy rate on hold until end-2012. However, if the global growth outlook deteriorates in the coming months, we think Bank Negara has both the scope and willingness to cut the policy rate,” it noted.

Credit Suisse said it believed the ringgit would continue to trade in line with its regional peers in the near term.

“However, we think Bank Negara may allow some ringgit outperformance if and when the eurozone situation stabilises, given that Malaysia's current account surplus remains strong, domestic demand resilient, and there are signs of pick-up in US economic activity.

“Domestically, the election result should also be an important determinant of capital flows. A poor outcome for the ruling party could lead to heightened political uncertainty and capital outflows,” it said.