The 2012 Budget projection to trim the fiscal deficit to 4.7 percent of the gross domestic product (GDP) from 5.4 percent this year is likely a surprise to markets, particularly given the expectations of a general election, says research house Nomura.

"We think it looks ambitious, it assumes 2012 real GDP growth at 5-6 percent which is better than this year’s 5-5.5 percent forecast and hence, seems optimistic given the global outlook.

"Nonetheless, judging from the muted reaction of the bond markets after the budget speech, investors may be pricing in some improvements in the fiscal position," it said in its Asia Economic Alert.

Nomura said the lower deficit signalled the government’s commitment to the medium-term goal of fiscal consolidation, highlighting that it has to “manage the delicate balance between supporting growth momentum, while staying in the prudent fiscal management course."

This should also create some room to introduce more stimulus later on when it becomes necessary although so far there has been no explicit strategies to deal with another external downturn.

In this context, the research house said the focus was primarily on political objectives ahead of the elections.

Prime Minister Najib Abdul Razak announced a special stimulus package through a private financing initiative, “an approach [that] has been successful in stimulating the economy through implementation of productive projects and enhancing the people's well-beingt.”

Nomura said there were plenty of one-off give-aways, which combined with the above mentioned anti-inflation measures, "suggest elections are near in our view."

These include civil servants pay hike, a rural transformation programme, and cash handouts to low-income households.

Despite these, it said, total expenditure is expected to rise only 0.5 per cent year-o-year next year versus 12.8 per cent increase projected for this year.

The government is sticking to 5.4 per cent fiscal deficit this year despite the outperformance in revenue collections and lower than programmed spending in the first half of this year.

This leaves plenty of scope for the rest of the year to accelerate expenditure disbursements beyond seasonal increases (spending in H2 is usually higher than in the H1 and some of these are likely to involve reallocation of funds for higher election-related spending).

The research house said while the fiscal balance projected in the 2012 Budget suggests recognition of the need for fiscal consolidation,"we think it may prove unrealistic given the prospect of elections in the near term and the downside risks to growth.

"We maintain our fiscal deficit forecast for 2011 and 2012 at 5.3 per cent and 5.1 per cent, respectively," it added.

- Bernama

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