KUALA LUMPUR, Oct 11 (Reuters) - Malaysia’s government on Friday unveiled a smaller budget for next year as revenue is expected to fall, but said it would hike development spending to offset a slowdown in global demand.
As expected, the government also said it would run a larger fiscal deficit of 3.2% of gross domestic product (GDP) - compared with an initial target of 3% but lower than this year’s 3.4% - to help spur economic activity.(BUDGET HIGHLIGHTS:)
Southeast Asia’s third-largest economy bucked a global cooling trend and grew faster than expected in the first half of 2019, but analysts say the U.S.-China trade war and expanding protectionist policies around the world will eventually drag on the export-reliant country.
The government, nevertheless, forecast economic growth of 4.8% next year, slightly higher than this year’s projection of 4.7%, and pencilled in a very modest improvement in exports.
“Domestic demand will anchor growth with the external sector expanding moderately against the backdrop of a challenging global environment,” the government said in its Economic Outlook report, released along with the second budget of Prime Minister Mahathir Mohamad’s ruling coalition.
The government budgeted 297.02 billion ringgit ($70.85 billion) in spending for 2020, 6% lower than the 316 billion ringgit earmarked for this year.
Revenue is forecast at 244.53 billion ringgit in 2020, down 7.1% from this year’s projection. Unlike this year, there will be no repeat of a 30 billion ringgit one-off payout to the government by state energy firm Petronas.
The government’s operating budget will drop sharply to 241.02 billion ringgit next year from 262.26 billion ringgit allocated for this year.
But development spending will expand to 56 billion ringgit from 53.7 billion ringgit in 2019, to fund the government’s plan to boost economic activity, invest in education and training, and “revitalise public institutions and public finances”.
Analysts had expected the government to unveil an expanded budget overall, but it is grappling with a 1 trillion ringgit debt pile left behind by its predecessors, limiting its room to man oeuvre.
In an accompanying fiscal outlook report, the government said it would also set aside an additional 3 billion ringgit to speed up ongoing major infrastructure projects.
Finance Minister Lim Guan Eng had flagged it would be a “challenge” to meet its earlier deficit target for 2020, due to uncertainties tied to the protracted Sino-U.S. trade war.
The government said the economy is expected to growth in the range of 4.5% to 5.0% over 2020-2022.
Domestic demand is expected to rise 4% this year with the pace accelerating to 4.8% next year, supported by a stable labour market and low prices.
Inflation is seen at 2% in 2020, up from a projected 0.9% this year, as the government introduces a targeted fuel subsidy plan.
The government expects private sector activity to continue to prop up the economy. The services sector, which accounts for about 58% of GDP, is forecast to grow 6.1% in 2019 and 6.2% next year.
The government also expects a quicker pace of expansion in manufacturing and construction in 2020, though it sees mining sector growth moderating. Agriculture is seen growing at a slower pace of 3.4% in 2020 compared to 4.3% this year.
Policymakers expect petroleum-related revenue to fall 1.4% to 50.5 billion ringgit in 2020, based on an assumed average global crude oil price of $62 per barrel.
Gross exports are estimated to expand by 0.1% in 2019 and 1.0% the following year.
The current account surplus is likely to widen to 43.4 billion ringgit in 2019 on an increase in net exports of goods and services. However, projected weakness in global and domestic demand and commodity prices are expected to slash that figure to 29 billion ringgit in 2020.
The government said monetary policy has been “accomodative and supportive of growth amid stable prices” in 2019, and expects it to continue to support economic growth and ensure price stability.
“Moving forward, Malaysia’s resilient economy is likely to support the movement of the ringgit amid a challenging global outlook,” it said. ($1 = 4.1920 ringgit)
Reporting by Joseph Sipalan; Editing by Kim Coghill