Fiscal reforms for sustainable growth

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By CECILIA KOK cecilia_kok@thestar.com.my
The Star Malaysia
17 August 2013

THE call for Malaysia to expedite structural reforms to rebalance its economy and strengthen its public finances has grown increasingly louder in recent weeks following Fitch Ratings’ downgrade of the country’s credit outlook from “stable” to “negative”.
According to economists, addressing the country’s long-running deficit and high public debt is not a rocket science. The right approach, they point out, has to be two-pronged: one is by cutting down on expenditure through subsidy rationalisation and stemming of wastage and inefficiencies, while the other is by expanding revenue base through tax reforms to reduce the nation’s reliance on petroleum-derived revenue.
Still, such fiscal consolidation measures require strong political will on the part of policymakers to execute in order to bring about positive change for the country’s economy over the long term.
As Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc, points out, there are near-term political hurdles, especially in view of the upcoming Umno party elections, to overcome in order to implement the necessary fiscal consolidation measures to rein in deficits and burgeoning public debt.
Nomura is one of the few investment bankers that expect Malaysia to miss its fiscal deficit target for 2013. In its recent report, Nomura says it expects Malaysia’s fiscal deficit this year to remain unchanged from last year at 4.5% of gross domestic product (GDP) vis-à-vis the Government’s target to cut the deficit to 4% of GDP in 2013.
“For the first half of the year, Malaysia’s fiscal deficit is already tracking above 5% of GDP. While I believe the Government would likely pursue fiscal consolidation measures (particularly in light of Fitch’s outlook downgrade) for the remaining part of the year, I think those measures will be only implemented at a managed pace as opposed to doing it aggressively to achieve the full-year target,” Paracuelles explains to StarBizWeek.
While Paracuelles concedes that fiscal consolidation measures might present headwinds to Malaysia’s economic growth in the short term, he says they will eventually give the Government more fiscal flexibility to support implementation of more reforms.

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