May 20th, 2014 by Hafiz Noor Shams
The Malaysian federal government appears committed to cutting its fiscal deficit down to 3.0% of NGDP by 2015 (from 3.9% in 2013) and then balancing it by 2020. I think the 2015 target is achievable, especially with the GST coming in next year. As for the 2020 goal, that is far into the future to matter right now (in any case, I am a bit skeptical).
The deficit is slowly coming down. Sure, the expanding NGDP has helped a lot in bringing the ratio down but yearly government expenditure in 2013 did grow only 0.4% YoY, in contrast to the double-digit yearly growth seen recently. You could see it from the annual deficit in absolute terms. It was MYR43.8 billion in 2010 and in 2013, it was MYR39.5 billion. There is seriousness in the deficit cutting exercise, even if it is a recent phenomenon.
The seriousness however may bring another problem.
The combined government spending and government investment (public GFCF) figure has been growing pretty slowly. I would not call it austerity like some have. That is just loose talk. But still:
We do not really see the effect of slower public spending-investment growth on the RGDP headline in 1Q14, which grew 6.2% YoY, partly due to a low base effect (I think if you somewhat control the base effect, real growth might come out to 5.3% YoY, which is okay). Exports have been recovering strongly and that hides the weakness in government-related GDP components. Government-related components, make about 20%-30% of the total GDP.
Not that I am advocating more government spending. But if you are worried about just the headline growth regardless of its components, then this should probably bug you.
The strong export recovery also hides a weakening private consumption expansion caused by the subsidy rationalization exercise, which is a bigger issue. Private consumption makes up 60%-70% of the GDP. It grew slower from 7.4 YoY in 4Q13 to to 7.1% YoY in 1Q14. The 7.1% YoY is not a bad growth but it would likely decelerate further, with more subsidy cuts seem to be on the way as well as that expected benchmark rate hike. Also, the 2H13 private consumption growth rates were pretty high: it would be hard to maintain the same rates unless the consumers and the private sector get some big break. A break would mean no more subsidy cut for the year.
In short, the strong export recovery would probably hide the slower expansion experienced by the domestic GDP components in 1Q14.
Exports would like continue to grow for the rest of the year, but I am unsure how it well it would carry the whole economy when the other pistons are having issues (and one purposely being suppressed).