KUALA LUMPUR, Malaysia — Malaysia is accelerating infrastructure investment as Prime Minister Najib Razak leans on public expenditure to boost growth amid concern subsidy cuts and a new consumption tax will curb private spending.
The government will start work on projects such as highways and rail worth at least 75 billion ringgit ($23 billion), Najib said in a budget speech in Kuala Lumpur Friday. He announced wider exemptions of items under the goods and services tax to reduce the impact of the levy, as the finance ministry targets growth of as much as 6 percent this year and next.
Najib’s efforts to narrow Malaysia’s budget deficit through subsidy cuts have left companies and consumers grappling with higher costs, and inflation next year is forecast to be the fastest since 2008. With a target of becoming a developed economy by 2020 just six years away, the prime minister is shifting his focus to attracting foreign investment, boosting education standards and adding high-quality jobs.
“To remain resilient and competitive, Malaysia must move to an economy based on knowledge, high skills, expertise, creativity and innovation,” said Najib, who is also finance minister. “Economic planning and policies of a country need to be adjusted according to the developments and challenges in the domestic and external environment.”
Malaysia narrowed the budget shortfall to 3.9 percent of gross domestic product in 2013, and Najib said he is “committed” to trimming the gap to 3.5 percent this year and 3 percent in 2015, heading toward a balanced budget by 2020.
Among infrastructure investments Najib announced are the construction of a 1,663-kilometer (1,033 miles) highway between the states of Sabah and Sarawak on Borneo island worth 27 billion ringgit, and rail projects around the Malaysian capital.
“Infrastructure spending for 2015 is huge,” said Peck Boon Soon, an economist at RHB Research Institute in Kuala Lumpur. “This would continue to support the construction sector activities just like this year.”
The government raised fuel prices for the first time in more than a year on Oct. 2, and the prime minister said yesterday he will announce a “new mechanism” soon on a new petroleum subsidy program.
“Najib knows the credit-rating agencies are watching closely, and he delivers what they and the wider market players are looking for: fiscal consolidation,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “There is really no easy way out but to either reduce unnecessary expenditure or to boost the government’s receipts. It appears that a lot more emphasis is placed on the former.”
GDP will increase 5.5 percent to 6 percent this year, and between 5 percent and 6 percent in 2015, the finance ministry said in its 2014/2015 economic report. The central bank earlier projected 2014 growth of 4.5 percent to 5.5 percent.
Malaysia will exempt retail fuels, key food items and medicine from the GST of 6 percent, Najib said. He announced bigger cash handouts to lower-income households to help them cope with the tax that will start in April.
Consumer prices are forecast to rise 4 percent to 5 percent in 2015, compared with an average 3.3 percent in the first eight months of this year, the finance ministry said in its report Friday.
“Inflation is expected to remain manageable despite trending above the long-term average,” according to the report. “The strong capacity expansion over the past years will help to mitigate the cost pressures, while a more cautious stance of consumers would also contribute to moderating demand and hence prevent inflation from becoming more entrenched.”
The ringgit advanced by the most in six months on Oct. 9, amid optimism Malaysia’s budget will outline commitments to improve public finances. The government will “ensure” its debt level is capped below 55 percent of GDP, it said yesterday.
Najib’s administration is forecasting federal spending of 271.9 billion ringgit in 2015, according to the finance ministry’s report. Total expenditure for this year is estimated at 262.2 billion ringgit.
The central bank kept its benchmark interest rate unchanged last month after an increase in July and said it will assess the balance of risks between the outlook for growth and inflation when considering further policy moves.
“In 2015, monetary policy measures will continue to support growth while mitigating risks to economic and financial imbalances that could undermine the long-term growth prospects,” according to the finance ministry report.
Najib also unveiled a new program for some first-time property buyers that will provide financial assistance, stamp duty exemptions and 35-year loans to address concerns rising prices are hurting their ability to purchase their own homes.
_ With assistance from Choong En Han, Niluksi Koswanage, Elffie Chew, Ranjeetha Pakiam, Simon Harvey and Chan Tien Hin in Kuala Lumpur. — Bloomberg