Pensword Capital

By S JAYASANKARAN 
IN KUALA LUMPUR

MALAYSIA plans to cut its budget deficit to less than half the current levels over the next five years while spending handsomely and growing the incomes of its citizens. But its leaders will not pull the plug on the New Economic Policy (NEP) and some perks traditionally enjoyed by bumiputras.

The country's next five-year plan envisages a RM230 billion (S$97.8 billion) spending package to attain a 15 per cent rise in per capita incomes to US$8,600 and annual growth of 6 per cent.

The budget deficit will be cut to 2.9 per cent of gross domestic product (GDP) from 7.6 per cent last year.

Prime Minister Najib Razak announced these ambitious targets during the tabling of the Tenth Malaysia Plan (2011-2015) in Parliament yesterday.

'I would hesitate to comment right away,' said Manokaran Mottain, an economist with the Arab Malaysian Bank, 'but 6 per cent over the near term is gettable.'

Even so, Malaysia is expected to average only 4.2 per cent growth during the Ninth Malaysia Plan (2006-2010), a period when growth was supposed to be 7 per cent on average. And the 2009 recession - minus 1.7 per cent - wasn't the only reason for the low figure because the figure hardly topped 6 per cent in any one year during that period.

Getting the plan to succeed will be crucial to Mr Najib's objective of pulling Malaysia out of a middle-income trap that has steadily become apparent over the last five years. It will also be key to Malaysia's plans to become a developed country by 2020 - a stated goal of Kuala Lumpur since 1990.

For all that, however, Mr Najib's speech was as much political as it was economic. He carefully avoided mentioning how he intended to cut subsidies except to say that it would be 'gradual'.

Nor did he pull the plug on the NEP, reiterating that the 30 per cent bumiputra equity target - a cornerstone goal since 1971 and a key to the Malay agenda - 'remains'.

The NEP began in 1971 to help the country's majority bumiputra population - indigenes and mainly Malays - to achieve economic parity with their richer non-Malay countrymen. However, criticism that it distorted the economy, eroded competitiveness and raised costs resulted in a proposal in Mr Najib's New Economic Model - unveiled in March - that it be diluted.

It caused much unhappiness among the more right-wing elements in Mr Najib's ruling United Malays National Organisation which insisted that the Tenth Plan honour its obligations under the NEP. Clearly, the premier listened.

Mr Najib will have his work cut out for him as some of the targets he set were ambitious. He estimated that Malaysia would need an average of RM115 billion worth of private investment a year to achieve its target of growing private investment by 12.8 per cent annually.

That will be easier said than done. Private investment grew only by 2 per cent on average during the Ninth Plan. It is expected to grow 10 per cent this year but grew 30 per cent before the Asian financial crisis.

Mr Najib seems to be pinning his hopes on both private investment and domestic demand to maintain growth. The latter factor is actually more promising: It accounted for 5.4 per cent of GDP in the first quarter of 2010.

Ultimately, buoyant growth will be crucial to seeing through Mr Najib's plans. He aims to cut the deficit down to 5.3 per cent of GDP this year and bring it all the way down to 2.8 per cent of GDP by 2015.

By doing so, it will reduce government debt as a proportion of GDP to 49.9 per cent in 2015 compared to 52.9 per cent this year.

Mr Najib said that the government would cut its subsidy bill to RM15.7 billion in 2015 from the current RM18.3 billion, but he didn't say how.

The plan also said that Malaysia's tax base would be widened but, again, there were few details. It's likely to be through goods and services tax although the government baulked at introducing it last year after it was greeted with strong public opposition.