Budget 2014 will be keenly watched for a number of reasons. The biggest is to see just what the Government will announce to improve its fiscal position in light of a rating outlook downgrade by Fitch Ratings. That warning led to a cut in fuel subsidies and other measures and the Government has explained why that had been done. StarBizWeek editor Jagdev Singh Sidhu met with Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar for a greater understanding on why cuts were needed and the rationale behind policy changes that have been made.
Q: The Fitch warning certainly appears to kick things off. From the Government’s standpoint, how do you approach this issue?
A: First of all we need to be clear about the challenges we are facing. We are in a situation where growth is slower than what we had expected. Last year when we prepared the budget for 2013 we expected the external environment to be very conducive, manageable growth in China, didn’t expect commodity prices to come down so hard and certainly did not expect the kind of reaction we are facing now in the reversal of the quantitative easing by the Fed.
For the first quarter of this year, the GDP was 4.1% and 4.3% in the second quarter. Although it was better than the first quarter it was below what we had forecast and that had necessitated the revision by the central bank to 4.5% to 5%.
Secondly, it’s the way we manage our fiscal position. Last year we had a fiscal deficit of 4.7% of GDP and we made the commitment to reduce the deficit to 4% this year and to 3% by 2015.
In an environment where GDP is lower than what was anticipated, the need to manage our spending becomes more urgent.
That’s why we had to accelerate whatever rationalisation we had to have in terms of spending on subsidies and broadening the tax base and so on.
The third challenge that we have is in respect of the Government’s debt position. Last year we were at 53.3% and we are limiting it to the 55% debt ceiling that we have set for ourselves.
It’s in the context of trying to contain the deficit and the economy not growing at the rate we expected. There is a lower denominator and therefore there is a need to conserve more.
The fourth issue is about the narrowing current account surplus. We had a surplus of RM8.7bil in the first quarter and in the second quarter it was RM2.6bil.
We need to make sure that we don’t get into a deficit situation. We must understand that the reason for the contraction in the current account surplus is from the lower exports of our commodities. CPO exports in the first 6 months of this year actually came down by about 20% compared with last year.
At the same time we have imports of lumpy items, among others imports of vessels and aircraft, not only by Malaysia Airlines and AirAsia but also by Malindo.
That contributed to the narrowing of the trade surplus. On top of that, in arriving in the balance of payments of the current account you also have capital flows.
While FDIs continue to be good, Malaysian companies are investing abroad in recent times such as Petronas, Maybank, Axiata and CIMB.
That contributed to the net outflow, and then there are investments in properties by both Malaysian funds and companies in places like London, Singapore, Australia and so on.
When you add all that, it contributed in the narrowing of the current account surplus. We have to therefore track this carefully to make sure we do not get into a negative of deficit situation.