ANZ warns of risk of financial collapse if Malaysian government delays subsidy reform

KUALA LUMPUR (March 27): Malaysia risks not meeting its fiscal targets if the government delays the implementation of targeted subsidies at a time when inflation is expected to remain moderate. Australia and New Zealand Banking Group (ANZ) has issued a warning.

The comments came amid concerns that enrollment in the Padu central database, which is essential for assessing eligibility and providing targeted support, is lower than expected. Economy Minister Rafizi Ramli said on Monday that Padu has seen a sharp increase in registrations over the past week and will continue to increase until the March 31, 2024 deadline.

ANZ warned in its second-quarter economic outlook report that “any setback in targeted subsidy implementation would increase the risk of fiscal deterioration.” “This is not our base case right now.”

Malaysia has been working to reduce its long-standing fiscal deficit dating back to the 1998 Asian financial crisis. The government has recently introduced a number of measures to shore up weakened public finances, ranging from cutting subsidies to imposing additional taxes.

The key is to remove subsidies for fuel and other non-essential goods, which are widely condemned by economists as wasteful. To cushion the blow to the cost of living, the government has promised to provide cash and other aid. This year, the government aims to reduce the budget gap as a percentage of economic output to 4.3% from last year’s 5%.

“It is unclear how and to what extent the government will adjust fuel subsidies, but the impact on inflation is unlikely to be severe,” ANZ said. The average inflation rate is expected to be 2.8% in 2024 and 2.5% in 2023.

Government spending in January fell 8.2% year-on-year as revenue fell 15.1%. Revenue was close to historical run rates, but spending was below, ANZ noted.

The report said the delay in starting spending “may be intentional given the uncertainty surrounding fuel subsidies.”

ANZ broadly expects Malaysia’s economy to expand by 4.3% this year, in line with official forecasts of 4-5% growth, as slower household consumption is likely to be offset by higher investment and exports.

ANZ said consumer credit growth “cannot continue at the current pace” with household debt at high levels of around 82% of gross domestic product (GDP). Labor force participation is already close to historic highs, and lower inflation is increasing real purchasing power, which should limit rapid wage growth. ”

ANZ said the shift in the investment cycle was “evident in indicators and balance of payments” such as fixed asset financing, capital goods imports and foreign direct investment flows. The report highlighted that the pace of decline in exports of electrical and electronic products is slowing, while imports are increasing.

ANZ added that an increase in import shipments of electronic intermediate goods usually signals strong future export performance, and “We expect Malaysian exports to recover in the second half of this year.”

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