Malaysia Budget Day guide: juggling spending against deficit

[KUALA LUMPUR] Malaysian Prime Minister Najib Razak will unveil the government's spending plans for next year on Friday as he navigates an economic slowdown and a commitment to balance the budget by 2020, while facing his biggest crisis as premier.

South-east Asia's third-largest economy has been roiled by a funding scandal linked to Mr Najib that has spooked foreign investors and contributed to a sell-off in Malaysian markets. Moody's Investors Service has said it will be watching for any signs of slippage in efforts to trim the budget deficit.

"He would have to juggle between stimulating a sluggish economy and convincing investors of his fiscal rectitude, while keeping an eye on the political implications of it all," said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore.

The budget will be the first under the 11th Malaysia Plan, a development program for the country for 2016 to 2020. Here's what may be in store.

INFRASTRUCTURE PROJECTS

The bulk of transportation and highway projects will likely proceed to support construction activity and bolster growth, according to Julia Goh of United Overseas Bank Ltd. Mr Najib may elaborate on planned developments including the Kuala Lumpur- Singapore High Speed Rail, the Pan-Borneo highways and subway line extensions in the capital, she said in a note on Oct 1. There may also be proposals to boost electricity and clean water supplies to rural areas, according to MIDF Amanah Investment Bank Bhd.

COST RELIEF

Malaysia abolished fuel and sugar subsidies in recent years, implemented a new consumption levy in April and raised some toll rates this month. To ease the burden of rising costs, there may be bigger cash handouts to the poor, an acceleration of affordable housing projects, and a potential minimum wage increase, Malayan Banking Bhd analysts said.

The government said on Thursday it's "well placed" to provide assistance to vulnerable groups. Just don't expect goodies that aren't realistic, state news agency Bernama said, citing a finance ministry official that it didn't identify.

INVESTMENT INCENTIVES

As corporate earnings come under pressure in a slowing economy, companies may be reviewing or withholding investment in capacity, said Imran Nurginias Ibrahim of BIMB Securities Research.

Friday's budget may offer incentives to stimulate and sustain private sector investments with a focus on boosting productivity, he said. Investment incentives will probably be announced to support small and medium-sized enterprises, agribusiness ventures, as well as to boost manufacturing activities that generate a greater multiplier effect on the economy, Mr Imran said.

SUBSIDY RATIONALIZATION

The government may consider lowering subsidies for items including flour, cooking oil and liquefied petroleum gas to reduce its operating expenditure, according to RHB Capital Bhd. analysts. Any cuts would only be implemented gradually and need careful planning in view of rising living costs affecting the general population, they said.

SIN TAXES

Wiranto of OCBC said higher taxes on tobacco and alcohol may be "fair game" while UOB's Goh saw it as unlikely because the sectors had been set back by this year's goods and services tax implementation.

The "apparent resilience" of brewers could provide the basis for an increase but chances of higher levies on gaming are slim as such taxes are already higher than in neighbouring Singapore, RHB said.

BLOOMBERG