With eye on politics, Malaysia set for populist budget

KUALA LUMPUR (Reuters) - The Malaysian government is likely to announce several populist measures in its 2009 budget on Friday as it tries to tighten its weakening grip on power in the face of economic and political challenges.

The budget will be presented just a day after Anwar Ibrahim, a former deputy prime minister and now the de facto opposition leader, will be sworn into the parliament following his convincing victory in a by-election.

Anwar, who has vowed to overthrow the government of Prime Minister Abdullah Ahmad Badawi, has promised to reinvigorate Malaysia's economy, which has lost some of its attractiveness as an investment destination to faster-growing regional rivals.

"We expect the government to pull all stops with an expansionary, populist budget, designed to yield maximum political mileage during this critical period for the government," Citigroup said in a research report.

"The twin overriding objective would be to placate public unhappiness over soaring inflation, as well as keep the BN (ruling coalition) component parties happy and minimise the possibility of further defections to the opposition coalition," it said.

Prime Minister Abdullah has already said that the budget may include some relief for the poor to shield them from high prices, and analysts said the steps could include cash handouts, incentives for small and medium entrepreneurs, and tax cuts.

Annual inflation in Malaysia surged to 8.5 percent in July, the highest since December 1981 and well above expectations, and the central bank has said it is likely to stay high this year and early next year.

The government has already brought forward fuel price cuts after it slashed subsidies earlier this year in a move that was lauded by economists but shattered its popularity.

"This (the budget) would also aim to shore up support for the government following the huge fuel price hike in June and the electoral setback earlier this year," the United Overseas Bank said in a recent report.

Abdullah is facing renewed calls to step down from some in the United Malays National Organisation (UMNO), the main party in the coalition that has ruled Malaysia for five decades, after Anwar's better-than-expected election result.

Analysts said the government has already given a taste of populist economic policy by announcing a surprising cut in fuel prices last week.

The government is also expected to announce a significant increase in development spending, which analysts say could slightly widen the fiscal deficit.

"The fiscal deficit was brought down from 5.3 percent of GDP in 2002 to 3.2 percent of GDP in 2007, but it is projected to widen to 3.5-4.0 percent in 2008-09, reflecting largely higher operating and development expenditure," CIMB said in its budget preview.

"Malaysia is going to tolerate for a couple more years deficit budget spending, which has been the case since 1998," CIMB said.

According to Citigroup, the average annual development expenditure is likely to be 53-57 billion ringgit in 2009-10, significantly above the average of 38.9-41.6 billion ringgit in 2006-08.

"The extent of the government's generosity would only be capped by concerns over the size of the fiscal deficit, though windfall petroleum revenues would provide some important relief," it said.