(Adds comments from Mahathir, and ratings agency Fitch)
By Joseph Sipalan and Rozanna Latiff
KUALA LUMPUR, Nov 2 (Reuters) - Malaysia unveiled an expanded budget on Friday, and set a higher fiscal deficit target for 2019, as the new Mahathir Mohamad-led government faced up to challenges boosting revenue in a slowing economy, while saddled with large debts left by its predecessor.
Delivering its first budget since winning power six months ago, the coalition government laid out plans for cuts to public investment, and increase revenue from privatising infrastructure assets and a one-off dividend of 30 billion ringgit ($7.20 billion) by state energy firm Petronas.
Mahathir had warned of cuts to spending, blaming the previous administration of Najib Razak for saddling the country with debt of more than 1 trillion ringgit.
His government also had to fill a revenue shortfall from the scrapping of an unpopular consumption tax.
“Although the budget is more than the previous year, you must also remember that we also carry the burden of having to pay our debt that was incurred by previous government,” Mahathir told reporters after his finance minister presented the 2019 budget to parliament.
But with Malaysia now forecasting this year’s fiscal deficit would be the highest in five years, it will face worries over whether it can avoid a possible credit rating downgrade.
Sagarika Chandra, Associate Director in Fitch Ratings’ Asia-Pacific Sovereigns team, said the government’s “failure to stick to a more conservative fiscal consolidation path raises some concerns about policy credibility.”
Finance Minister Lim Guan Eng said total revenue is projected to rise 10.6 percent to 261.8 billion ringgit next year, thanks largely to the Petronas dividend.
Expenditure has been budgeted at 314.6 billion ringgit ($75.53 billion), up 8.3 percent from this year’s budget as the government recognised certain items not listed in the previous budget.
Mahathir said the government will issue before March a 200 billion yen Samurai bond with low interest rates to pay back some of the “costly” loans taken by the previous administration. More Japanese loans were possible, he said.
The government abandoned an earlier fiscal deficit target of 2.8 percent for this year, saying it will widen to 3.7 percent — the highest since 2013. Najib’s government had reduced fiscal deficit for eight straight years to 2017.
It is targeting fiscal deficit of 3.4 pct in 2019 and 2.8 percent by 2021, and 2 percent over the medium term.
The government said it was resetting “its fiscal consolidation path starting from 2019 to account for narrow revenue base, additional provision for off-budget items and tax refunds.”
In an economic report released on Friday, Malaysia said it will cut public spending sharply despite foreseeing the economy growing more slowly.
Lim and Mahathir blamed the Najib administration for the wider deficits.
Najib is facing multiple charges of corruption, money laundering and abuse of power, mostly related to a defunct state fund, 1Malaysia Development Bhd.
The former leader has denied any wrongdoing, and has accused his successors of trying to belittle his economic successes. Najib had introduced the consumption tax, which Mahathir scrapped, to reduce reliance on oil and gas revenue.
But the new budget shows an increasing dependence on Petronas, which Mahathir said could afford to pay more to the government because of higher oil prices.
Other than the special dividend, Petronas will also pay a regular dividend of 24 billion ringgit. Its dividends alone account for about 20 percent of Malaysia’s revenue next year.
Much of Petronas’ dividends will go towards settle outstanding tax refunds.
“A heavier reliance on commodity-based revenues presents an additional risk to Malaysia’s fiscal accounts in the absence of more structural revenue-raising measures,” Andrew Wood, an analyst at S&P Global Ratings, said.
The government will also sell non-core state assets and land, privatise infrastructure assets, review existing tax structures and incentives offered to companies to boost revenue prospects. It is also reviewing several projects awarded by the previous administration. ($1 = 4.1640 ringgit) (Additional reporting by Liz Lee and Emily Chow; Writing by A. Ananthalakshmi; Editing by Simon Cameron-Moore)