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By Stephanie Phang and Soraya Permatasari (Bloomberg) -- Malaysia's government said it will post its biggest deficit since 2003 as it cuts taxes and boosts spending to stymie an opposition challenge, putting its credit ratings and currency at risk.
The budget gap will widen to 4.8 percent of gross domestic product this year from 3.2 percent in 2007, Prime Minister Abdullah Ahmad Badawi told parliament yesterday. 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. Abdullah is fighting off opposition leader Anwar Ibrahim, who returned to parliament in a by-election this week and has pledged to topple the government by mid-September. The wider deficit may prompt a downgrade in Malaysia's credit rating, reducing investment coming into the country and making it more expensive for local companies to borrow. ``It's a fairly political budget and very much focused on alleviating the hits to incomes from inflation,'' said Robert Prior-Wandesforde, senior Asia economist at HSBC Holdings Plc in Singapore. The size of the deficit may ``lead the rating agencies to have a closer look at their ratings'' for Malaysia. Malaysia's credit rating outlook was changed to ``stable'' from ``positive'' by Standard & Poor's in May after Abdullah's ruling coalition lost ground in March elections. S&P said the country's credit standing was ``constrained by its fiscal position.'' `Some Pressure' S&P rates Malaysia's foreign currency debt A-, the fourth- lowest investment grade, and hasn't changed that stance since 2003. Moody's Investors Service has kept Malaysia's foreign currency debt rating at A3, the same investment level as S&P, since 2004. ``There could be some pressure on the currency,'' said Aninda Mitra, a sovereign analyst at Moody's Investors Service in Singapore. ``You have a much higher fiscal deficit than expected. Higher borrowing needs and unexpected inflation may not be very good for fixed income holdings of foreign residents, so that could put some pressure on the currency.'' The ringgit has lost 2.6 percent against the U.S. dollar this year. The Malaysian currency today completed its biggest monthly loss since the end of a peg against the dollar in 2005. Announcing a 5.1 percent increase in next year's spending, Abdullah yesterday pledged bonuses to civil servants, promised free electricity for the poor, lowered duty on home purchases and doubled the number of households on state welfare. Higher spending in 2008 will reverse five years of shrinking budget deficits. Leadership Challenge Abdullah, 68, is facing renewed calls from his own ruling National Front coalition to resign after leading the government in March to its worst election performance in half a century. The handouts may soften the impact of the fastest inflation in 26 years and stall a campaign by opposition leader Anwar Ibrahim to oust the government. ``These are populist measures,'' said Singapore-based Kelvin Miranda, an investment strategist at Blufire Asset Management Sdn., which manages $110 million in assets. ``He's trying to buy time.'' Abdullah increased by 20 percent the tax on cigarettes sold by companies including British American Tobacco (Malaysia) Bhd. to help offset the widening gap between spending and revenue. Voter anger over rising prices contributed to opposition gains in the March vote that deprived Abdullah's coalition of its two-thirds majority in parliament. Malaysia's inflation accelerated to 8.5 percent last month after the government raised fuel prices to lower subsidies as crude surged. Shares Advance Malaysian stocks jumped the most in more than five months yesterday on speculation that the first cut to the personal income tax rate in seven years will spur consumer spending. Abdullah proposed a range of tax exemptions for employers, from medical costs to maternity expenses. Abdullah needs Malaysians to spend more as exports slow to the U.S., Malaysia's largest trading partner. The Asian nation's economy expanded at the slowest pace in a year in the second quarter as manufacturing eased amid a global slowdown and faster inflation hurt consumer spending. Southeast Asia's third-largest economy grew 6.3 percent in the three months ended June from a year earlier, down from a 7.1 percent gain in the first quarter, the central bank said yesterday. Economic growth is forecast to ease to 5.7 percent this year and 5.4 percent in 2009, the weakest pace since 2005. `Seize Power' Anwar, who won a parliamentary by-election this week, has said he plans to lure enough lawmakers from the ruling coalition to form a new government next month. The former deputy premier has promised to reduce fuel prices should he seize power. ``The government is responsive to the concerns of the people and has taken measures to lighten the burden of all Malaysians,'' Abdullah said in his speech. ``Efforts by certain parties to destabilize the country by attempting to seize power through illegitimate means, and without the mandate of the people, must be rejected.'' Governments across Asia are spending more on subsidies to help the poor cope with higher oil and food costs. Inflation that the Asian Development Bank estimates may reach the highest in a decade in 2008 has stoked voter unrest in the region. Malaysia's government subsidies on bread, cooking oil, fuel and programs to enhance food security will jump to 34.1 billion ringgit this year and total 33.8 billion ringgit in 2009, according to the finance ministry. Still, the ministry expects the budget deficit to narrow to 3.6 percent of GDP next year.
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