Malaysia’s 2016 fiscal deficit target unchanged at 3.1% of GDP

Malaysia's Prime Minister Najib Razak announced the country's 2016 budget restructuring, keeping fiscal deficit target unchanged at 3.1% of GDP. The Malaysian government expects oil prices in 2016 to be USD30-35/bbl as compared with its earlier projection of USD48/bbl. Meanwhile, Bank Negara Malaysia Governor Zeti stated that inflation forecast for 2016 continues to be 2.5%-3.5%.

Najib also emphasised that the economy grew around 5% in 2015, whereas the budget deficit was 3.2% of the GDP, on par with the revised expectations. The Malaysian government has cut its 2016 growth projection to 4%-4.5%, as compared with the earlier forecast of 4%-5%. Barclays forecasts the economy to expand 4.7%.

The unchanged fiscal deficit target is likely to be driven by cuts in expenditure made to the operating side, with certain revenue-boosting measures on the non-oil front. In order to increase revenue under emergence of stress on the revenue front, the Malaysian government might undertake measures such as privatisation of non-core assets.

"Without the spending cuts outlined today, we believe Malaysia's 2016 fiscal deficit would have widened to 3.9% of GDP. In our view, today's announced targets are achievable, as long as growth is close to the upper end of government's target range", says Barclays.

According to Barclays, the budget revisions for 2016 are more beneficial for consumption, while fiscal consolidation is now more constrained by declining oil prices. The country's structural fiscal dependency on oil-related revenues has considerably declined due to lower oil prices. It is expected to be lower than 14% of overall revenues in 2016.

"Fiscal consolidation appears to be a priority for the government, and we believe it is likely to adhere to the 3.1% of GDP target for the deficit, with further reductions in development spending likely, if needed", says Barclays.