KUALA LUMPUR: Prime Minister Datuk Seri Najib Razak will say on Friday, Oct 15 that the government has hit its budget target for the first time in three years and announce deficit reductions for 2011.
Two government sources with direct knowledge of the budget told Reuters on Tuesday, Oct 12 that the 5.6 percent of gross domestic product deficit target for 2010 would be hit and that further consolidation would be announced in a move that would boost markets.
"We are achieving our budget deficit target of 5.6 percent (of GDP) this year because the government has taken some cost-cutting measures. It puts us on track for a lower target in 2011," one of the sources said.
The sources could not be named due to the sensitivity of the issue.
A deficit of 5.6 percent of GDP this year would be in line with analyst expectations in a Reuters poll on Tuesday that forecast the deficit in 2010 would be 5.4 percent of GDP and 4.5 percent of GDP in 2011.
"Anything with a 4 percent handle (2011 deficit) is reflective of reining in the large deficit and reflects the seriousness of the government in keeping up with its reforms," said Suresh Kumar Ramanathan, rates and foreign exchange strategist at CIMB Investment Bank.
"There will be lower funding issuance next year if the deficit is smaller and it keeps the term structure of the curve rather flat. It should play positively for government bond holders in an environment of low interest rates regime across the globe," he added.
FISCAL DEFICIT TURNAROUND
Najib, who has overseen the economy for the past two years, had initially run up a 20-year high budget deficit of 7 percent in 2009 after implementing a 67 billion ringgit ($21.61 billion) stimulus package at the height of the global financial crisis.
Malaysia's economy grew far faster than the expected 9.5 percent in the first half of 2010 and a successful budget consolidation would enable the government to reach its target of a deficit of 2.5 percent of GDP deficit in 2015, shoring up its credit rating.
In July, Fitch maintained its "A" local currency rating for Malaysia with a stable outlook after a 2009 downgrade from "A-plus" due to concerns over the rising deficit.
STRONGER RINGGIT, LOWER FUNDING GAP
Although fiscal consolidation should lead to lower bond issuance, Malaysia has a significant amount of government bonds maturing in the next few years as a result of the cumulative fiscal deficits in recent years.
According to Citigroup, 45 billion ringgit of government bonds are due to mature next year and its estimate of a 2011 deficit of 4.6 percent of GDP would leave an additional funding gap of 35.3 billion ringgit.
"We still expect a sizeable rise in gross issuance to 75-80 billion ringgit in 2011, despite fiscal consolidation," it said in a note on Monday.
Yields for Malaysia's five-year government bond have fallen 57 basis points this year as foreign investors reversed outflows and bought into Malaysian markets.
The ringgit, which has already hit 13-year highs on these inflows, would stand to gain further on positive consolidation news, CIMB's Ramanathan said. - Reuters
Two government sources with direct knowledge of the budget told Reuters on Tuesday, Oct 12 that the 5.6 percent of gross domestic product deficit target for 2010 would be hit and that further consolidation would be announced in a move that would boost markets.
"We are achieving our budget deficit target of 5.6 percent (of GDP) this year because the government has taken some cost-cutting measures. It puts us on track for a lower target in 2011," one of the sources said.
The sources could not be named due to the sensitivity of the issue.
A deficit of 5.6 percent of GDP this year would be in line with analyst expectations in a Reuters poll on Tuesday that forecast the deficit in 2010 would be 5.4 percent of GDP and 4.5 percent of GDP in 2011.
"Anything with a 4 percent handle (2011 deficit) is reflective of reining in the large deficit and reflects the seriousness of the government in keeping up with its reforms," said Suresh Kumar Ramanathan, rates and foreign exchange strategist at CIMB Investment Bank.
"There will be lower funding issuance next year if the deficit is smaller and it keeps the term structure of the curve rather flat. It should play positively for government bond holders in an environment of low interest rates regime across the globe," he added.
FISCAL DEFICIT TURNAROUND
Najib, who has overseen the economy for the past two years, had initially run up a 20-year high budget deficit of 7 percent in 2009 after implementing a 67 billion ringgit ($21.61 billion) stimulus package at the height of the global financial crisis.
Malaysia's economy grew far faster than the expected 9.5 percent in the first half of 2010 and a successful budget consolidation would enable the government to reach its target of a deficit of 2.5 percent of GDP deficit in 2015, shoring up its credit rating.
In July, Fitch maintained its "A" local currency rating for Malaysia with a stable outlook after a 2009 downgrade from "A-plus" due to concerns over the rising deficit.
STRONGER RINGGIT, LOWER FUNDING GAP
Although fiscal consolidation should lead to lower bond issuance, Malaysia has a significant amount of government bonds maturing in the next few years as a result of the cumulative fiscal deficits in recent years.
According to Citigroup, 45 billion ringgit of government bonds are due to mature next year and its estimate of a 2011 deficit of 4.6 percent of GDP would leave an additional funding gap of 35.3 billion ringgit.
"We still expect a sizeable rise in gross issuance to 75-80 billion ringgit in 2011, despite fiscal consolidation," it said in a note on Monday.
Yields for Malaysia's five-year government bond have fallen 57 basis points this year as foreign investors reversed outflows and bought into Malaysian markets.
The ringgit, which has already hit 13-year highs on these inflows, would stand to gain further on positive consolidation news, CIMB's Ramanathan said. - Reuters
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