KUALA LUMPUR (March 27): Malaysia faces higher risk of missing its own fiscal targets if the government delays targeted subsidy implementation at a time when inflation is expected to remain benign, Australia & New Zealand Banking Group (ANZ) cautioned.

The comment comes amid concerns over lower-than-expected registration in the Padu central database crucial for evaluation of eligibility and targeted delivery of assistance. Padu has seen a sharp rise in registration in the past one week, Economy Minister Rafizi Ramli said on Monday and will continue to rise until the March 31, 2024 deadline.

“Any push-back in targeted subsidy implementation will raise the risk of fiscal slippage,” ANZ warned in its economic outlook report for the second quarter. “This is not our base case for now.”

Malaysia has been trying to shrink a long-running fiscal deficit that stretches back to the 1998 Asian Financial Crisis. Most recently, the government has introduced a slew of measures ranging from trimming subsidies to imposing additional taxes in a bid to fix its weakened finances.

The key is the withdrawal of subsidies for fuel and other non-essential items widely panned by economists for being wasteful. To soften the blow on cost of living, the government has pledged to dish out cash and other aid. This year, the government is targeting to narrow its budget gap as a proportion of economic output to 4.3% from 5% last year.

“How the government will calibrate fuel subsidies and by how much is unclear, but their impact on inflation is unlikely to be severe,” ANZ said. It forecasts average inflation for 2024 at 2.8% versus 2.5% in 2023.

Government expenditure contracted 8.2% year-on-year in January as revenues shrank 15.1%; revenues were closer to the historical run-rate while expenditure underperformed, ANZ flagged. 

The slow start to expenditure could be “deliberate, given the uncertainty around the fuel subsidy,” it noted.

Broadly, ANZ forecasted Malaysia’s economy to expand 4.3% this year, in line with official projections for 4%-5% growth, as slowing household consumption will likely be compensated by stronger investment and exports.

Growth in consumer credit “cannot continue at the current pace” amid high level of household debt at around 82% of gross domestic product, ANZ said. Faster growth in wages will be constrained as labour force participation is already near a historical high, and gains in real purchasing power from lower inflation have been realised.”

A turn in the investment cycle is “evident in indicators,” such as fixed asset-related loans, capital goods imports and foreign direct investment flows and in the balance of payment, ANZ said. The pace of decline in exports of electrical and electronic products is easing while their imports are rising, it highlighted.

Rising inbound shipment of electronic intermediates typically signal stronger exports ahead and “we anticipate Malaysia’s exports to recover in the second half of the year,” ANZ added.