KUALA LUMPUR (Reuters) - Malaysian Prime Minister Najib Razak is expected to put a raft of populist measures into the 2017 budget he unveils on Friday, in a bid to assuage voters unhappy with his leadership and rising living costs.
The budget will be Najib's best opportunity to shore up support before possible early polls, but any widening of the fiscal deficit at a time the economy is cooling could risk downgrades to Malaysia's sovereign rating.
Growth has slowed in each of the last five quarters, reaching 4.0 percent in April-June as poor oil prices have squeezed Southeast Asia's third-largest economy. The government's current 2016 full-year forecast is 4.0-4.5 percent.
Public debt as a percentage of gross domestic product is just short of Malaysia's 55 percent ceiling, rising from 43 percent in 2008. Its budget deficit was 5.6 percent of GDP in January-June, far above the year's 3.1 percent target.
Najib has battled calls to step down over a scandal involving 1Malaysia Development Berhad (1MDB) scandal, removed critics from his administration and consolidated support in a state election and two by-elections this year.
The past year has been turbulent for Najib as 1MDB became the center of a civil suit filed by U.S. prosecutors. The fund is linked to probes in at least six countries including Switzerland and Singapore. Najib has denied any wrongdoing.
An election can wait until August 2018, but Najib - who will face his toughest poll test - may call one in the second half of 2017, a government official said.
Wellian Wiranto, economist for OCBC in Singapore, said the coming budget could be "more crucial" than previous ones.
"People always remember the last goodies they have, and the more goodies you can deliver to the political vote bank, the better," he added.
Populist measures have been a theme of Malaysian budgets since Najib became prime minister in 2009. The focus has been on cash aid to low-income families and development projects for rural regions where the ruling Barisan Nasional (BN) coalition gleans a large chunk of votes.
In the budget, Najib is likely to stick to his past formula, driven "more by political calculations", Wiranto said. "It's a matter of 'what can we do to be popular enough'."
But the extent of government largesse will be constrained by Malaysia's need to contain its budget deficit.
"Deterioration in fiscal discipline and broader public finances leading to higher government debt and deficit levels could be negative," Fitch said in a statement to Reuters.
Most analysts don't see much room for Najib to spend heavily as revenue from natural gas and oil Malaysia has been hurt by low global prices.
The sharp dive in global crude prices made state oil firm Petronas slash its dividend payout to the government to 16 billion ringgit this year from last year's 26 billion ringgit.
Najib, who is also the finance minister, hinted at constraints last week, telling the state news agency Bernama "There are so many things that we need to do but one have to realize that it has to be in the context of our affordability and also that we need to rein in or at least manage our debt and fiscal deficit in a prudent way."
Asset management firm Affin Hwang expects Najib to increase annual handouts to poor households, to possibly make tax cuts for the middle-class and to keep the good-and-services tax rate at 6 percent.
Public housing is also expected to figure prominently in the new budget, which could allow first-time house buyers to access more of their pension funds to buy property.
Analysts also expect Najib to announce that the corporate tax rate, now 24 percent, will be cut by 1 percentage point in 2018.
Editing by Praveen Menon and Richard Borsuk