Malaysia's Worsening Deficit Is a Concern, S&P's Ogawa Says

By Stephanie Phang

Sept. 1 (Bloomberg) -- Malaysia's widening budget deficit is a ``matter of concern'' as a growing opposition challenge forces Prime Minister Abdullah Ahmad Badawi to spend more to bolster support, said Standard & Poor's.

``The fiscal trajectory of Malaysia is a little bit worse than, for example, half a year ago,'' Takahira Ogawa, director of sovereign ratings at S&P' in Singapore, said in an interview today. ``Malaysia's fiscal consolidation is very slow. If the large size of the fiscal deficit is difficult to consolidate in the medium term, then it will be a bigger issue.''

Abdullah said on Aug. 29 his government will post its biggest budget deficit since 2003 this year, and plans to cut taxes and boost spending in 2009. Malaysia's credit rating outlook was changed to ``stable'' from ``positive'' by Standard & Poor's in May after the ruling coalition lost ground in March elections.

S&P said then the country's credit standing was ``constrained by its fiscal position.''

Malaysia's budget gap will widen to 4.8 percent of gross domestic product this year from 3.2 percent in 2007, Abdullah said in last week's budget speech. The top income tax rate will be cut to 27 percent from 28 percent and 1.1 million households will benefit from free electricity, he added.

Earlier last week, opposition leader Anwar Ibrahim returned to parliament in a by-election. He has pledged to topple the government by mid-September. The opposition alliance lead by Anwar deprived Abdullah's ruling coalition of its two-thirds majority in parliament for the first time in three decades in March.

Win Support

The budget measures are probably designed ``to win back the support of the general public,'' Ogawa said today. ``Given the political situation in Malaysia, they have to pay more attention to the immediate concerns of the public'' rather than introduce policies that may be unpopular in order to address longer-term economic growth.

Ogawa declined to say whether S&P will review its credit ratings for Malaysia, or when such a review may be due.

S&P rates Malaysia's foreign currency debt A-, the fourth- lowest investment grade, and hasn't changed that stance since 2003.

There's a risk next year's deficit will exceed the government's target of 3.6 percent of GDP, depending on the pace of economic growth, global oil prices and the political situation, Ogawa said.

``The government might have to increase some of the fiscal outlays to address those who are on the lower end of the income spectrum,'' he said. ``The political situation is still difficult to foresee in the next half a year or so.''

To contact the reporters on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net