A Malaysian budget for re-election

Prime Minister Abdullah Ahmad Badawi proposes a budget that emphasises spending -- a move that surely will help him rebuilt political goodwill amidst attacks from his predecessor Mahathir Mohammed.
Malaysia unveiled a budget that will probably go down well with the populace, emphasising development spending and corporate tax breaks that has some analysts wondering if the prime minister plans to call elections next year.

ôPrime Minister Abdullah Ahmad Badawi unveiled a 2007 budget that looks designed to boost his popularity in the face of a stiff challenge from his predecessor Dr Mahathir Mohammed,ö says Tim Condon, a Singapore-based analyst at ING.

Abdullah, who is also finance minister, notes that the budget, unveiled on Friday (Sept 1), includes a 31% year-on-year increase, equivalent to 2.1% of GDP, and a further 24% rise in 2007 on development spending, with roads, bridges, ports, airports and railways all receiving extra funding. Plus, there are numerous tax incentives, including a plan to slice the corporate tax rate by 1% point to 27% in 2007, with a further reduction to 26% suggested for 2008. The stated aim, of course, is to help corporates be more competitive û but it also looks a wise political move.

The government also plans to spend M$4 billion for programmes to ôeradicate povertyö and narrow the gap between the country's urban population and rural poor û another vote getter. Plus, it will invest M$1 billion for research and development activities, particularly in the biotechnology and information technology industries.

ôThe budget begs the question, is the PM planning to call elections next year? Regardless, the big spending increase should mean that 2006 marks the low in government bond yields,ö says Condon.

The Finance Ministry said it would sell M$36.1 billion of bonds in 2006, up from M$31.5 billion in 2005, to finance the fiscal deficit. The ministry announced that the ability to raise funds in the domestic market would enable it to forego borrowing in the eurodollar bond market for a fourth straight year.

Abdullah also predicts that GDP growth would hit 5.8% this year (an upward revision from the previous 5.5% projection but slightly lower than the central bank's 6% forecast) and that it would clock in at 6% next year. As with earlier forecasts, he expects the deficit to shrink to 3.5% this year and 3.4% in 2007.

Are these predictions realistic? Robert Prior-Wandesforde, a Singapore-based economics analyst with HSBC wrote in a research report that, ôThe key threat comes from a slowdown in the US economy. In contrast to the other main ASEAN countries, Malaysia has seen the share of its exports going directly to the US increase over the last few years. It now stands at 20%, which is the same as the Philippines and more than both Singapore(14%) and Thailand (15.5%). In addition, there will be other exports that ultimately end up in the States, even if the US is not the first destination. Given this, we believe the country will do very well to register the 9% export growth anticipated by the government next year, after 12.4% growth in 2006. If exports do slow more aggressively, then this in turn is likely to mean that GDP growth will also be softer, bearing in mind that exports represent more than 120% of GDP and are a key driver of the labour market and domestic demand developments in the country.ö

If the US holds steady, and Malaysia continues to benefit on the export front, it would seem likely that Abdullah will hold elections early û and lock-in the political good will from the budget.
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