* 2016 GDP growth target reduced to 4-4.5 pct
* Fiscal deficit target kept at 3.1 pct of GDP
* Economists say deficit target may be hard to reach
* Najib says revisions will save 9 billion ringgit
KUALA LUMPUR, Jan 28 (Reuters) – Malaysia on Thursday trimmed its 2016 growth forecast and said it would cut spending as slumping global oil prices squeeze the finances of Southeast Asia’s third-largest economy.
It also maintained its fiscal deficit target for this year at 3.1 percent of gross domestic product, contrary to expectations by some economists that the gap would be widened.
The world’s second-largest exporter of liquefied natural gas has been hit hard by a tumble in crude oil prices, which Malaysia assumed in its initial budget in October would average $ 48 a barrel this year.
But oil prices are around $ 30 a barrel – Malaysia has changed its 2016 forecast to $ 30-$ 35 – and state firms such as Petronas are cutting their contribution to the government as profits slide.
The Malaysian economy is now expected to grow 4.0-4.5 percent this year, down from an earlier forecast of 4.0-5.0 percent, Prime Minister Najib Razak said.
He said that there will be savings of 9 billion ringgit ($ 2.13 billion), or 3.4 percent of the government spending originally planned for 2016. The savings will be made on both operational and development expenditure, Najib said.
“Malaysia has been tested with many unexpected challenges beyond our control,” said Najib, who has had to revise his budget for a second straight year.
Economists had expected cuts of about 7 billion ringgit and an upward revision of the fiscal deficit target.
FISCAL SLIPPAGE?
Some economists are sceptical that this year’s budget gap can be kept to 3.1 percent.
“We caution that odds of fiscal slippage remain high with little manoeuvring space, especially if oil remains on a significantly lower glide path and tax revenue is crimped by lower corporate profits and weaker growth,” said ANZ economist Weiwen Ng.
The budget revisions were announced two days after Malaysia’s attorney-general cleared Najib of any criminal offences or corruption, closing investigations into a multi-million dollar funding scandal that has hurt investment.
But his troubles are far from over as Najib continues to face economic woes, including slowing growth and a public outcry over rising costs.
In Thursday’s speech, Najib made clear the government has no plans to increase the goods and services tax, which is now at 6 percent, and announced 11 calibrated measures including lower employee pension contributions and tax relief for lower income earners.
The GST was imposed in April 2015 to help narrow Malaysia’s fiscal deficit. ($ 1 = 4.2170 ringgit) (Reporting by Kuala Lumpur Newsroom; Editing by Richard Borsuk)
