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October, 2018 8:27 PM


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"Smarter spending" drives Malaysia's recent investment cuts

Malaysia Finance Minister Lim Guan Eng has refuted suggestions that the country is now pursuing austerity measures after saying that recent cuts to public spending are due to a desire to be "smarter" with investment.

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By Jackson Lewis 09.10.2018

Malaysia Finance Minister Lim Guan Eng has refuted suggestions that the country is now pursuing austerity measures after saying that recent cuts to public spending are due to a desire to be “smarter” with investment.

In a speech on Monday, Lim said that the current government does not want to repeat past mistakes and is looking a adopt a more democratic approach to procurements and projects to prevent overspending. He claims that “selective” investments will serve the country better in the long term as it looks to support sustainable growth.

“All we are doing here is pulling back excesses of the past. What we are calling for is not austerity but smarter spending," Lim said at the Khazanah Megatrends Forum 2018. He added: “Let me stress here that Malaysia is not in austerity mode; we want to see economic growth progressing."

While a more prudent approach to spending is now in practice, Lim noted that the government will support key priority areas when necessary. He said: “If there are priority areas that require spending, we would be more than happy to spend – especially when it leads to long-term sustainable growth that improves the well-being of the people.”

Lim’s comments come in the wake of the Finance Ministry’s decision to cut the cost of a multibillion-dollar mass-rapid transit project. The Southeast Asian nation continues to struggle with mounting debts and liabilities, and Prime Minister Mahathir Mohamad has been reviewing programs that he claims began under unfair terms before he arrived in office.

Over the weekend, Lim said that the Malaysian government is eager to obtain value for money on public expenditure, though this is an even more pressing concern when “large borrowings are required.”

Fiscal consolidation may now be in the offing, but Lim noted on Monday that such a plan would be risky, as accelerated consolidation could impact growth. He added: “We need to pursue economic diversification. Fiscal consolidation is a means towards fiscal sustainability. But sustainability requires a reasonable level of economic growth.”

Malaysia will be more cautious on the fiscal front in the short term as it looks to rein in the debt accrued by the previous government. A sizeable US$240bn worth of debts and liabilities remain, which amounts to around 80% of the country’s gross domestic product (GDP).

Lim believes that Malaysia’s corporate sector can underscore efforts to keep the economy above water for the time being while investing in the medium to long term to support growth. The corporate sector is not experiencing as much debt, as listed companies’ arrears are a comparatively small 20% of GDP.

As ever, the ongoing US-China trade battle brings its own risks, and Malaysia could see the effects of the spillover. Despite global headwinds, Lim said that the country’s robust economic fundame ntals and current account will stand it in good stead and ensure that it will not run twin deficits.

Malaysia’s current account is set to remain in surplus during the rest of the year after closing H1 of 2018 at 2.7% of GDP. However, a weaker-than-expected second-quarter surplus and a low trade balance in August has raised concerns driven in part by a testing period after the annulment of the Goods and Services Tax. 

Lim concluded that smart and responsible fiscal policy will be the order of the day and that Malaysia will focus on keeping exports competitive as trade uncertainty abounds.

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