Malaysia trims 2016 growth forecast to 4 - 4.5 percent

Malaysia trimmed its growth expectations for 2016 after a decline in oil prices crimped the outlook for exports and government revenue. Prime Minister Najib Razak is counting on consumers to hold up the economy, finding ways to put more money in their pockets.

The government will reduce mandatory employee contribution rates to the national pension fund by 3 percentage points in a move that could boost private spending by 8 billion ringgit ($1.9 billion) a year, Najib said in a speech Thursday. The economy will expand 4 percent to 4.5 percent this year, compared with an earlier projection of as much as 5 percent, he said.

Najib is prioritizing efforts to halt a growth slowdown after weathering a scandal so far over a murky $681 million "personal donation" from the Saudi royal family. As he faces constraints in introducing new measures to boost revenue, the plunge in oil meant a spending review for a second year to keep fiscal deficit targets in check and avoid a credit rating downgrade.

"It has been a ' crude' awakening for Malaysia," said Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. "Odds of fiscal slippage remain high with little maneuvering space, especially if oil remains on a significantly lower glide path and tax revenue is crimped by lower corporate profits and weaker growth."

The ringgit gained 1.2 percent to 4.2070 a dollar in Kuala Lumpur Thursday. The Malaysian currency has strengthened about 2 percent against the greenback this year, after tumbling more than 18 percent in 2015.

The government is sticking to its budget deficit target of 3.1 percent of gross domestic product for 2016, Najib said, adding he was confident the economy grew 5 percent last year and the fiscal shortfall was 3.2 percent of gross domestic product. "Prudent measures" by the government will save 9 billion ringgit in operating and development expenditure, he said, without elaborating on steps to be taken to achieve those savings.

Malaysia will study a redistribution and bidding process of its telecommunication spectrum to optimize revenue, Najib said, sending shares of the country's biggest mobile providers lower. The country will pursue tax evaders more aggressively, relook at tax- exempted imports of vehicles, cigarettes and liquor on some duty-free islands, and prioritize projects that have a bigger multiplier impact on the economy.

"The spending cuts to achieve the fiscal deficit target are big on headlines, but short on details," said Michael Wan, an economist at Credit Suisse Group AG in Singapore. "The government might eventually have to go a bit further to meet its fiscal deficit target" by cutting more subsidies, he said.

Moody's Investors Service lowered its credit-rating outlook for Malaysia this month, citing an external environment that has crimped government revenue. Malaysia, as Asia's only major net oil exporter, risks losing 300 million ringgit for every $1 per barrel drop, according to official estimates.

Najib said Thursday revenue is estimated to fall by as much as 9 billion ringgit compared with when oil was at $48 a barrel, the government's previous assumption level for planning purposes for 2016. It is now assuming Brent at $30 to $35 a barrel.

"The government is banking on the hope that a 3.4 percent reduction in expenditure will be enough to counter a 33 percent drop in oil price," said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore.

The government will cut the employee contribution rate to the pension fund from March this year to December 2017. Najib also announced tax reliefs for those earning 8,000 ringgit and below, a measure that will cost the government 350 million ringgit and benefit two million taxpayers.

To bring down costs and alleviate the burden on households, Najib said import quotas on eight agricultural produce including meat will be liberalized temporarily, while the poorest families will be supplied with 20 kilograms (44 pounds) of rice a month for the rest of the year.

A key consumer confidence gauge fell to a record low last quarter, and households are turning more negative in their financial outlook for the first half of 2016. Inflation is expected to be 2.5 percent to 3.5 percent this year, central bank Governor Zeti Akhtar Aziz said Thursday, higher than an October forecast of 2 percent to 3 percent.

"The actual delta to the economy depends how much is being spent by households as compared to being saved as precautionary savings in such dire economic environment," ANZ's Ng said.