Malaysian Prime Minister Najib Razak’s election victory yesterday gives the 59-year-old leader his first mandate to push ahead with restructuring of the nation’s finances to balance the budget.
Najib, who took over the leadership a year after the last election, led the Barisan Nasional coalition to victory with the help of a spending spree that swelled the national debt. He may resume cutting fuel subsidies in the second half and impose a sales tax in 2014, said Lim Su Sian, an economist at HSBC Holdings Plc in Singapore. Najib has pledged by 2020 to end the deficit, which exceeded 4 percent of gross domestic product last year.
“We will likely see the government pay greater attention to fiscal consolidation after the string of populist handouts in the run-up to elections,” said Chua Hak Bin, an economist at Bank of America Corp. in Singapore.
Stocks surged to a record and the ringgit rallied the most since 2010 after Barisan Nasional extended its 55-year rule, affording Najib another five years to move the economy toward the goal of developed status by 2020. Southeast Asia’s third- largest economy has reported 15 years of budget deficits, and spending has prompted credit rating companies to highlight risks to government finances even as growth accelerates.
Najib went on a spending binge to woo voters, including smartphone rebates for youths, household electricity subsidies and higher wages for civil servants. A thousand taxi drivers received grants to offset the cost of a new Proton Holdings Bhd. car, while others got rebates for new tires. Najib said this year cash transfers to poor households will take place annually.
Standard & Poor’s in September estimated Malaysia’s gross general government debt would rise to 53.9 percent of gross domestic product in 2012, from 51.9 percent in 2011.
Fitch Ratings said today it is seeking “greater clarity” on Malaysia’s fiscal and economic policies amid rising public debt ratios and delays in subsidy reforms. The nation’s central bank forecasts growth of as much as 6 percent this year, from 5.6 percent in 2012.
Rising growth may help Najib revive efforts to rein in the deficit and move toward his party’s “Vision 2020” goal, a 30- year plan laid out by former premier Mahathir Mohamad in 1991 to make Malaysia a high-income country.
To do that, Najib needs to attract investment and create jobs. Since taking charge, he has streamlined bureaucracy and opened up more industries to foreign investors. In September 2010, he unveiled a so-called economic transformation program that identified $444 billion of private-sector-led projects the government planned to champion, ranging from mass rail to oil storage.
“With the election out of the way, policy makers must now focus on maintaining the healthy economic performance achieved in recent years as well as persevering with the current economic transformation,” said Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore.
Still, the weaker performance of the ruling coalition at the polls may make it more difficult to implement changes.
Najib’s Barisan Nasional coalition won 133 seats in the 222-member parliament, while opposition leader Anwar Ibrahim’s People’s Alliance had 89 seats, according to Election Commission results. The prime minister had sought to secure more than the 140 seats won by his coalition in the last election to avoid a potential internal party challenge later this year.
The “weaker mandate from the election will essentially put into question the strength of the political will,” Seah said. “Expect a bumpy road ahead on this economic transformation.”
The smaller victory margin may also add to pressure on the prime minister to extend handouts and continue affirmative- action programs for the Malay majority that led to an erosion of support from ethnic Chinese voters.
“Changes to affirmative-action policy to be needs-based rather than race-based appear less likely now, given the necessity of maintaining the support of the conservative Malay majority,” said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc.
Malaysia is vying for investment with other developing economies in Southeast Asia, including Indonesia, the Philippines, Thailand and Vietnam.
“Encouraging inward FDI is crucial given the structural outflows Malaysia has seen in recent years,” said Lim of HSBC. “The outlook for direct investment will remain uncertain until it becomes clearer whether or not Najib’s reform-minded policies will continue.”
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