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March 12, 2009

Malaysia: Political woes overshadow budget boost

Malaysia's huge budget spend may be one of the biggest in the world relative to the size of the economy but the political woes of the country's incoming premier may have limited its effectiveness, reported Reuters.

Of the 60 billion ringgit ($16.3 billion) figure announced by Deputy Prime Minister Najib Razak on Tuesday, just 17-18 billion ringgit is new federal funding and that is spread over two years.

While that will ease concerns of a massive slew of bond issues to finance the deficit, it does not guarantee a quick boost to a country which is the third most dependent in Asia on exports relative to gross domestic product (GDP).

The budget, which political and economic analysts say is short on details and transparency, may also do lasting damage to Najib who is due to take power at the end of March.

"He's got a lot of political issues which have preoccupied him and there's been an inadequate amount of attention on the severity of the economic crisis," said Terence Gomez, professor at the University of Malaya economics and administration faculty.

Malaysian exports plunged 28 percent in January, leaving the country of 27 million people teetering on the edge of its worst economic performance since the Asian crisis a decade ago.

While the economy was tanking, critics charge that Najib spent too much time politicking ahead of March polls in the United Malays National Organisation (UMNO), the main party in the National Front coalition that has ruled Malaysia for 51 years.

In February, Najib was busy plotting a putsch to take control of the northwestern state of Perak from the opposition, a move that would have seen him emerge as a winner for a government that is still reeling from big election losses a year ago.

That move misfired when the opposition People's Alliance dissolved the state assembly and the state is now in limbo.

Recently, more lurid details have emerged in Malaysia's online media of the killing of a Mongolian model. Najib has repeatedly denied involvement and there is no direct evidence linking him to it, but the issue has damaged his credibility.

And on April 7, Najib will face a crucial electoral test with a parliamentary by-election and three state seat by-elections.

"Publicly, his image has taken a major battering after what happened in Perak, first of all, and subsequently the further disclosures on the killing of the Mongolian lady, so he's really going out on a limb here trying to redeem himself," said Gomez.

Although the spending measures planned by countries in response to the global economic slowdown are not directly comparable and cover different time periods, Malaysia's equals nine percent of GDP, second to China's announced 12 percent.

While government-backed newspapers in Malaysia hailed the package, with the New Straits Times splashing Transfusion!" across its front page, market enthusiasm was limited.

As stock markets across Asia rallied after a rise on Wall Street, Malaysia's main index .KLSE was up just 0.9 percent, compared with a 1.75 percent gain in neighbouring Singapore.

While other governments have put money into the pockets of the consumer, there was no such cheer in Malaysia.

"As the much hoped-for tax cuts failed to materialise, the direct relief for the man on the street seems limited," Chris Eng, head of research at Malaysian investment bank OSK wrote in a report published on Wednesday.

Bond markets, spared a slew of new issuance, also failed to rally with yields on the benchmark 10-year issue stuck near Tuesday's closing levels at 4.2 percent.

"We think the package will probably cushion, but cannot prevent a recession. The worst case scenario for the fiscal deficit has been averted for now, but further slippage remains a risk," Citibank economist Wei Zheng Kit said in a report.

Kit estimates there will be bond issues of 92 billion ringgit on a gross basis this year to finance the budget deficit which the government now forecasts will be 7.6 percent of GDP.

Having failed to reassure markets, Najib also faced more political pressure from the opposition on Wednesday.

"As far as the package is concerned, it is business as usual, no commitment to reforms or strengthening institutional governance," opposition leader Anwar Ibrahim, a former finance minister and deputy prime minister, told a news conference.
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