KUALA LUMPUR (NewsRise) -- Malaysia trimmed this year's growth forecast as feeble crude oil prices forced the oil exporting nation to revise its annual budget for the second year running. However, it stuck to its initial fiscal deficit aim of 3.1% of gross domestic product.
Unveiling the revised budget on Thursday, Prime Minister Najib Razak announced steps to boost private consumption that is expected to keep the economy humming and reiterated the government's resolve to spend on projects such as hospitals, roads and rail networks that offer broader economic gains. However, the government will be "prudent" in operating spending and will also "rationalize" grants to state agencies and state-run companies, which could generate 9 billion ringgit ($2.14 billion) in savings. Najib didn't disclose the specific initiatives that are likely to see spending cuts.
"The recalibrated measures announced are proactive, transparent and realistic in tandem with the current global economic challenges," Najib said.
Cuts to operating expenditures are positive in the medium term, given the relative difficulty in trimming this spending, Nomura's economists Euben Paraceulles and Brian Tan said.
The government now expects the economy to grow between 4.0% and 4.5% this year compared to its earlier forecast of up to 5.0% expansion.
While Malaysia's commitment to fiscal discipline is encouraging, it will come at the cost of slower economic growth," said Capital Economics analyst Krystal Tan. "Taking into account the broader impact of lower oil prices on the economy and the central bank's limited scope to support growth, we doubt Malaysia's economy will grow any faster than 4.0% this year."
Southeast Asia's third largest economy relies heavily on oil exports to fill the government's coffers and fund massive spending on public projects. The unlisted Petronas, the sole Fortune 500 Company from the trade-reliant nation and the country's most profitable enterprise, is the single largest source of government revenue contributing through taxes and dividends.
The government estimates it loses about 300 million ringgit in revenue with every $1 drop in crude price.
Thursday's revised budget assumes the average Brent, the global benchmark for crude oil, at between $30 and $35 a barrel compared with the original budget announced in October that estimated crude price at $48 a barrel. Brent prices have since tumbled 31%, trading around $33 a barrel on Wednesday.
In order to keep more cash in hands of consumers, Najib announced a three percentage-points reduction in mandatory pension fund contribution. The measure is expected to boost consumer spending by 8 billion ringgit annually. The government will also provide tax relief that is expected to benefit two million middle-class taxpayers in the country.