Hafiz Noor Shams
Financial Times
20th Oct 2015

Scandal-stricken premier faces tough choices between pleasing voters and keeping fiscal balance

Najib Razak, Malaysia’s beleaguered prime minister and finance minister, is being pulled in opposite directions by conflicting imperatives.

One is political. Voters, dismayed by a slowing economy and allegations of personal corruption and other irregularities at state fund 1MDB — vigorously denied by Mr Najib and the fund — are piling on the pressure for an increase in public spending.

The economic imperative, however, demands spending cuts, as depressed energy prices and slowing growth threaten to reverse the benefits of fiscal reforms enacted over the past several years.

True, a goods and services tax introduced in April is bringing in additional revenues. But these pale next to a drop of more than 40 per cent in revenues from petroleum royalties and taxes in the first half of 2015 from a year earlier. Such revenues will probably fall further in the second half — a serious blow, given that they contributed about a third of all government revenues in 2014.

Petronas, the national oil company, is digging into its reserves and reining in capital spending in an attempt to pay the government a dividend of RM26bn ($6.3bn) this year, RM3bn less than in 2014. Despite the cut, the payout ratio — dividend paid relative to net profit — is rocketing to an unsustainable level.

FT Confidential Research, a research service at the Financial Times, expects it to pass 100 per cent this year (see chart). To keep it at a manageable level, Petronas will almost certainly have to cut its dividend again in 2016, putting further pressure on the government’s fiscal position.

The state of the economy and the allegations swirling around the government have soured the national mood. Surveys by FT Confidential Research show that, despite a small uptick in the third quarter, sentiment among the population towards both economics and politics remains at badly depressed levels.

Hence the pressure on Mr Najib to keep voters happy, especially those in his Bumiputera (indigenous Malaysian) and rural base. The government has already said it will expand an annual cash transfer programme for poor households next year, from the RM5bn allocated this year.

It is also investing more in rural infrastructure. One example is construction of the toll-free Pan-Borneo Highway, finally under way after years of delays. The pressure to spend will probably last right up to the next general election, which must be held by August 2018.

But political survival is not Mr Najib’s only problem. Fitch, Moody’s and S&P, the three big credit rating agencies, all have Malaysia at the same level — A- or A3 — seen as the bottom rung of upper medium grade, and four notches above non-investment grade or junk. All have said Mr Najib’s fiscal reforms were important in convincing them to maintain those ratings this year.

The reforms include cutting the fiscal deficit to 3.4 per cent of GDP last year from about 6.7 per cent in 2009. Yet FT Confidential Research reckons the deficit will rise to between 3.6 and 3.8 per cent this year, in contrast to the official projection of 3.2 per cent published in January.

Mr Najib, in his role as finance minister, will present the government’s budget on October 23. Opposition parties will turn the parliamentary session into a vote of no-confidence against him. While the odds of his being ousted are low, the vote will serve to highlight the political hostility he faces, from the opposition and from within his own party — as if the inflammatory comments on his social media accounts were not proof enough.

Between political survival and Malaysia’s ratings, something seems likely to give sooner or later.