By Joseph Sipalan, Rozanna Latiff and Liz Lee
KUALA LUMPUR (Reuters) - Malaysia's government on Friday unveiled a smaller budget than expected for next year but flagged a wider budget deficit than earlier estimated, and said it would step in with stimulus measures should global demand worsen.
Southeast Asia's third-largest economy bucked a global cooling trend and grew faster than expected in the first half of 2019, but analysts say the U.S.-China trade dispute and expanding protectionist policies around the world will eventually drag on the export-reliant country.
Nevertheless, Prime Minister Mahathir Mohamad's government forecast economic growth of 4.8% next year, slightly higher than this year's projected 4.7%, and pencilled in a very modest improvement in exports. (For budget highlights, click)
Analysts said the growth projection for next year was optimistic, with economic research consultancy Capital Economics forecasting only 4%.
"In the event of continued worse-than-expected external environment, the government stands ready to step in with contingency measures to provide further support or stimulus to growth," Finance Minister Lim Guan Eng said in a two-and-half-hour budget speech in parliament.
As expected, the government projected a fiscal deficit of 3.2% of gross domestic product (GDP), larger than an initial target of 3% but lower than this year's 3.4%, citing a heightened risk of a global economic slowdown and unanticipated spending needed to rescue troubled state institutions.
The government expects the fiscal deficit to average 2.8%over the medium term.
Lim had said earlier it would be a "challenge" to meet the earlier deficit target for 2020.
"Set against a projected contraction in revenues, the expanded budget puts the government’s original 3.0% deficit target for 2020 further out of reach," said Anushka Shah, senior analyst at Moody’s Investors Service.
"Fiscal strength will continue to constrain Malaysia’s credit profile, although the focus on some inclusive growth measures will be credit positive for the country if sustained over time."
Malaysia's stock market (KLSE) ended higher on Friday as Lim delivered his speech.
INCENTIVES FOR INVESTMENT
Malaysia will also provide tax exemptions to promote high value-added activities in its massive electrical and electronics industry, as it looks to attract companies moving operations from China because of the escalating Sino-U.S. tariff battle.
New incentives for foreign investment will be finalised by Jan. 1. The government will also extend up to 1 billion worth of customized incentives annually over five years, as part of push to attract top global companies.
The government budgeted 297.02 billion ringgit ($70.85 billion) in spending for 2020, 6% lower than this year.
Analysts had expected an expanded budget overall, but the government is grappling with a 1 trillion ringgit debt pile left behind by its predecessors and with declining revenue.
Revenue is forecast at 244.53 billion ringgit in 2020, down 7.1% from this year's projection. Unlike this year, there will be no repeat of a 30 billion ringgit one-off payout to the government by state energy firm Petronas (PETR.UL).
However, Lim ruled out reintroducing a goods and services tax (GST) that was repealed last year.
The government's operating budget will drop sharply to 241.02 billion ringgit next year from 262.26 billion ringgit allocated for this year. But development spending will expand to 56 billion ringgit from 53.7 billion ringgit in 2019.
In an accompanying fiscal outlook report, the government said it would also set aside an additional 3 billion ringgit to speed up ongoing major infrastructure projects.
MODEST GROWTH OUTLOOK
The government said the economy is expected to grow in the range of 4.5% to 5.0% over 2020-2022.
Domestic demand is expected to rise 4% this year and 4.8% next year, supported by a stable labor market and low prices.
The government expects private sector activity to continue to prop up the economy. The services sector, which accounts for about 58% of GDP, is forecast to grow 6.1% in 2019 and 6.2% next year.
Policymakers expect petroleum-related revenue to fall 1.4% to 50.5 billion ringgit in 2020, based on a global crude oil price of $62 per barrel.
Gross exports are estimated to expand by 0.1% in 2019 and 1.0% the following year.
The current account surplus is likely to widen to 43.4 billion ringgit in 2019 on an increase in net exports of goods and services. However, projected weakness in global and domestic demand and commodity prices is expected to slash that figure to 29 billion ringgit in 2020.