Malaysia hopes for faster growth, lower budget deficit in 2017

By Joseph Sipalan

KUALA LUMPUR, Oct 21 (Reuters) - Malaysia is banking on domestic demand and a recovery in global commodities prices to help it grow slightly faster in 2017 and reduce its large budget deficit.

The government projects that Southeast Asia's third-largest economy should grow 4-5 percent next year. In January, it had to slash its 2016 budget lower this year's growth forecast to 4.0-4.5 percent as revenue plummeted when oil fell to $30 a barrel.

The forecast was contained in the government's annual economic report, which was released just ahead of Prime Minister Najib Razak's announcement of the 2017 budget.

"We will continue to ensure economic indicators - such as inflation levels, growth rates and debt levels - remain strong and resilient, reflecting the core fundamentals of the economy,"  Najib said on Thursday.

Malaysia's current account surplus is expected to shrink further - narrowing to 14.8 billion ringgit ($3.54 billion) in 2017 from 16.4 billion ringgit this year and 34.7 billion ringgit in 2015.

The government led by Najib, who might call an early election in 2017, forecast a budget deficit to 40.3 billion ringgit or 3 percent of GDP for the coming year.

That would be a slight improvement on the 3.1 percent target for 2016. But in the first half of this year, the budget deficit reached 5.6 percent. Ratings agencies have warned of a possible downgrade if the budget deficit is too large.

Global oil prices have recovered somewhat this year amid expectations that OPEC-member countries will agree on a production cut at a meeting scheduled for Nov. 30.

The global price is important to Malaysia, which exports oil and natural gas, and the higher oil level has buoyed the ringgit currency

STRONGER EXPORTS SEEN

In 2017, government revenue is seen rising by 3.4 percent to 219.7 billion ringgit next year, after a decline of 3 percent this year, as higher tax collections, including 40 billion ringgit expected from the goods and services tax (GST), offsets a drop in oil revenue.

The economic report says demand in the private sector will be a key driver of the economy in 2017, and will be supported by "pro-growth fiscal and accommodative monetary policies" and a stable inflation rate of between 2 and 3 percent.

The government also sees expansion across all five of its key sectors - services, manufacturing, agriculture, mining and construction - on expectation that gross exports will grow 2.7 percent in 2017, compared with the projected 1.1 percent rate this year.

Leading the exports push will be a projected 4.1 percent expansion in manufacturing, largely supported by sustained demand for electrical and electronic goods.

The world's second-largest exporter of natural gas expects to reverse the decline in liquefied natural gas (LNG) exports once the Petronas floating LNG 1 rig comes online next year, adding 1.2 million tonnes to annual production to push a 1.4 percent expansion in total output.

The government also expects agriculture to grow by 1.5 percent in 2017 after a projected contraction of 3.3 percent this year, as demand for oil palm and rubber is seen improving.

Total government debt is expected to go down to 53.2 percent of GDP this year. In 2015, government debt was at 54.5 percent, just shy of Malaysia's 55 percent debt ceiling. ($1 = 4.1850 ringgit) (Editing by Praveen Menon and Richard Borsuk)