Reuters
, Thursday October 16 2008
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By Varsha Tickoo
KUALA LUMPUR, Oct 16 (Reuters) - Malaysia's budget deficit is likely to surge to its highest level in five years this year and will remain stubbornly high in 2009 as economic growth slows in the face of a global credit crisis, a key thinktank said on Thursday.
The Malaysian Institute of Economic Research (MIER) said the country's budget deficit could exceed 5 percent of gross domestic product (GDP) this year, the highest since 2003, and could be as much as 4 percent in 2009.
"We see increased (government) expenditures but the revenue not keeping pace with it. We may end up with a much bigger deficit than we are planning on," MIER Executive Director Mohamed Ariff told reporters.
The government predicts the budget deficit will drop to 3.6 percent of GDP in 2009 from 4.8 percent predicted for this year.
The thinktank forecasts economic growth to slow to just 3.4 percent next year, down from 5.3 percent forecast for 2008 as exports slow on the back of declining demand due to the global financial crisis.
That compares with the government's prediction for 5.4 percent growth in 2009.
Despite slowing growth, inflation is expected to remain "sticky" around 5.5 percent in 2008, Ariff said.
Malaysia's central bank has kept rates unchanged at 3.5 percent for over two years, despite surging inflation that has hit near 27-year highs at 8.5 percent recently. The central bank expects inflation to drop to 4 percent by mid-2009.
Prospects of slowing inflation and weaker growth could open the way for Malaysia's central bank to start cutting interest rates, although any cuts will be gradual and will only come at the start of next year, Ariff said.
POLITICS, A LONG TERM PLUS?
While Malaysia's political uncertainty which comes after 51 years of one-party rule has unnerved investors, it may prove positive in the longer term, Ariff said.
The opposition deprived the government of its two-thirds majority in parliament in elections in March and its assault has prompted the ousting of the prime minister as the rattled ruling coalition seeks to regain a grip on power.
"Malaysia is coming of age," said Ariff. "We're moving to a two-party system which is music for the ears because you can enjoy good governance and transparency, accountability and so on and so forth."
The opposition, led by Anwar Ibrahim, a former deputy prime ministers, has said it can take power and has criticised the Barisan Nasional government's handling of the economy as well as what it sees as rising corruption.
The thinktank forecasts that the Malaysian ringgit, which has fallen almost six percent against the dollar this year, would recover.
"The dollar has to cave in sooner or later," Ariff said. (Reporting by David Chance and Varsha Tickoo; Editing by Kazunori Takada)
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