Malaysia seen hiking tariffs to curb growth

Malaysia seen hiking tariffs to curb growth

KUALA LUMPUR (Reuters): Malaysia is expected to hike import duties on luxury goods and machinery, give tax breaks to export industries and delay more infrastructure projects in its annual budget for 1998, economists said.

They said these fiscal measures were aimed at slowing down growth and reducing the current account deficit, two major demands from foreign investors who have rocked Malaysia's economy by selling down its currency and stocks in the last few months.

The budget proposals will be announced by Deputy Prime Minister and Finance Minister Anwar Ibrahim in Parliament at 0800 GMT on Friday.

Most economists said the budget proposals would be watched closely to see if the government was serious in keeping its promises made during the current financial markets crises.

"I hope they do what the Indonesians have done. List the specific projects to be deferred (or canceled) and what is their impact in terms of expenditure," said Liew Yin Sze, chief economist with JM Sassoon & Co in Singapore.

He said most other measures were secondary as far as this budget was concerned.

Last month, Anwar announced some of the projects that would be delayed, including the $6.2 billion Bakun hydroelectric project, as the clamor for the slow down of the economy grew.

In a speech to foreign fund managers, he promised measures to boost exports and cut down imports. He said economic growth would slow to between six and eight percent next year.

"We feel the economy is moving quite fast. We would like to see the budget engineer a slowing of the economy through fiscal and monetary measures," said Ong Sin Beng, economist with JP Morgan in Singapore.

Much of Malaysia's growth over the last nine years has been pegged to infrastructure development. This has resulted in an average growth rate exceeding eight percent over that period.

Malaysia's gross domestic product grew by 8.2 percent in 1996. But an unavoidable side-effect of this growth has been rising corporate debt, with a worrying level of non-performing loans potentially able to wreak havoc with the balance sheets of local banks, the economists said.

Currently non-performing loans stand at around 3.5 percent of total outstanding loans for the banking industry. But analysts say an economic slowdown could see that figure rising to around six percent.

"Malaysia does need a period of consolidated growth. This would allow some companies that are over geared to unwind some of their debt," said a foreign fund manager in Kuala Lumpur.

Crucial to this consolidation is a hard-hitting budget that will drastically reduce the current account deficit, now running at around 5.5 percent of Gross National Product, say analysts.

"This would probably include measures to support local industries by encouraging people to buy from local support industries," said Eddie Lee, regional economist at brokers Vickers Ballas in Singapore.

Other measures may entail beefing up various existing funds to support small and medium-scale industries, he said.

Higher import duties on luxury cars and civil engineering equipment could also be on the cards, said Lee.

Most economists also believed that an expected cut in corporate tax rates, currently at 30 percent, will not come.

"It's going to be a painful Budget. He (Anwar) wants to see a bigger surplus than 1997. With the economy slowing, tax revenues will be slow. If you cut tax further it will cut revenues," said Tan Min Lan, an economist at Merrill Lynch.