Malaysian Prime Minister Najib Razak returned to power this year with the help of a spending spree that boosted consumption. Now voters could feel the pinch as he tries to appease a different group: rating companies.
Najib's government raised subsidised fuel prices for the first time since 2010 this month and has said it will delay some infrastructure projects, seeking to contain the budget gap and shore up the current account after Fitch Ratings cut Malaysia's credit outlook to negative in July. It is also considering a goods and services tax in the 2014 fiscal plan due Oct 25, 2013.
The government's spending restraint is aimed at maintaining confidence in Malaysia's fiscal outlook as capital outflows from emerging markets deliver particular trauma to countries like India and Indonesia, which are grappling with current-account deficits and budgets burdened with subsidy costs.
The ringgit weakened about 2% this quarter, among the worst performers in Asia. The country's default risk rose above that of the Philippines for the first time this year.
At 53.3%, Malaysia's debt-to-GDP ratio is the highest among 13 emerging Asian markets after Sri Lanka, according to data compiled by Bloomberg. Fitch cited rising debt levels and a lack of budgetary reform when it cut the country's rating outlook. Moody's Investors Service said this month the budget deficit may exceed 4% of GDP this year, warning the government's fiscal targets will become "increasingly out of reach" without additional measures to contain it.
Underweight Positions
The yield on Malaysia's 10-year ringgit-denominated bonds reached 4.13% on July 31, the highest level since January 2011, according to data compiled by Bloomberg. The rate has since declined 38 basis points, or 0.38 percentage point, to 3.758%.
As the prospect of reduced United States monetary stimulus fueled a selloff in emerging-market stocks and currencies in recent weeks, analysts at Barclays Plc last month recommended that investors hold underweight positions in Malaysian and Thai government debt. Credit Suisse said the two are "most obvious potential candidates" to face stress in their external financing after India and Indonesia.
Barclays on Monday changed its recommendation to neutral, citing the ringgit's underperformance against the Korean won and saying the government has taken steps to address the rating companies' concerns.
Inflation Risks
Malaysian consumers and businesses from builders to retailers are bracing for rising prices and slower economic growth, as the 11% increase in diesel and gasoline costs this month raises inflation risks while the potential slowdown in state spending cuts construction and maintenance contracts.
"Food is going to be more expensive and I think we will have to reduce eating out," said scrap-metal dealer Selvarajoo Sinnapan, 54, who has three cars and two trucks. "What I am more worried about is the price of food and other basic daily necessity things. I am sure many farmers and traders will start hiking up prices."
Economic growth may slow to 4.3% this year, the worst performance since the global recession in 2009, according to DBS Group Holdings Ltd. The banking group cut its forecast from 5% this month, saying the government's efforts to improve fiscal health will dent consumer spending and investment.
Najib went on a spending binge to woo voters before the May election, including smartphone rebates for youths, household electricity subsidies and higher wages for civil servants. He is now focusing government spending on more specific areas, saying public projects with low import content will continue while those requiring more imports will be "sequenced accordingly."
Exports Fall
Elsewhere in the region, Singapore's exports unexpectedly fell in August from a year earlier. The Reserve Bank of Australia, in minutes from its Sept 3 meeting released on Tuesday, repeated it retains the option of reducing rates and said a further decline in the currency would aid the economy as resource investment slows.
Trade and current-account balances in the euro area for July are due Tuesday. The US Federal Reserve begins its policy meeting at which it will decide whether to reduce its US$85 billion-a-month stimulus program.
Last week, Najib said Malaysia will set up a trust to expand education, home ownership and other affirmative-action measures for ethnic Malays and indigenous people as part of policies to further boost their share of the economic pie.
Malaysia joins Indonesia in a shift toward fiscal restraint. President Susilo Bambang Yudhoyono in June raised fuel prices for the first time since 2008.
Consumer Debt
The Malaysian fuel-price increase will hurt sales at retailers, said Raymond Teo, president of the Malaysian Retailers Association. Contractors and builders would also have reduced business opportunities when the government reschedules some infrastructure projects, according to a Malay contractors association and the Master Builders Association Malaysia.
Even Malaysians like T Y Hooi who are still willing to invest in property will come up against central bank measures to curb household debt. Since 2009, the 29-year-old entrepreneur has bought four condominiums around Kuala Lumpur.
"High consumer debt will limit the extent to which consumer spending can expand going forward," said Chua Hak Bin, a Singapore-based economist at Bank of America. "Robust consumer spending over the past decade was partly driven by leverage. That can no longer be an engine of growth."