UPDATE 2-Malaysia bites bullet on consumption tax

Reuters

(Corrects 2013 subsidy figure to 46.7 bln ringgit in paragraph17)

By Al-Zaquan Amer Hamzah and Siva Sithraputhran

KUALA LUMPUR, Oct 25 (Reuters) - Malaysia's government movedto allay concerns over its fast-rising debt on Friday,announcing a new consumption tax at a surprisingly high rate,abolishing subsidies on sugar and hiking property taxes todampen a surge in home prices.

Prime Minister Najib Razak, in his annual budget speech toparliament, announced his government would bring in a goods andservices tax (GST) in 2015 at a rate of 6 percent, above marketexpectations of 4 or 5 percent.

The ringgit currency gained against the dollar inlate trade as investors welcomed the tax, which is aimed atbroadening the revenue base in a country where only about 10percent of citizens pay income tax and most of the government'smoney comes from oil and gas.

Otherwise, Najib announced few major steps to cut subsidiesthat take up about a fifth of government spending, or deeperreforms such as reducing a bloated, but politically influential,civil service.

Once a high-flying "tiger" economy, Malaysia has becomeheavily dependent on commodity exports and struggled with lowprivate investment since the 1997-98 Asian financial crisis,despite a partial revival in recent years.

"The government has decided to implement a fair andcomprehensive tax system that benefits all Malaysians," Najibsaid. "The government believes that this is the best time toimplement GST as the inflation rate is low and contained."

(For highlights of the budget speech, click on )

Najib was under pressure to take bold steps after Fitchratings agency in July cut its outlook on Malaysia's sovereigndebt to negative, citing poor prospects for reform following adivisive May election.

Malaysian markets suffered a bout of turmoil over the summeras the country's shrinking current account surplus left itvulnerable to fund outflows driven by an expected tightening ofU.S. monetary policy.

Most economists said Najib's budget had gone some way torestoring confidence in the government's political will toimprove its finances, which has been shaken by a rapid rise indebt in recent years.

"The fact that they took the bold step to introduce 6percent at the start shows a lot of commitment in reining in thefiscal deficit," said Irvin Seah, DBS economist in Singapore.

"You won't see the full benefit of the GST on the fiscalposition at the outset... But in the longer term it will helpbolster the fiscal position."

Najib announced a raft of steps to offset the impact of theGST, including exemptions on basic food items and transport andone-off payments to poorer families. He also announced a cut incorporate tax of 1 percent to take effect in 2016.

Ratings agency Standard & Poor's called the budget "a stepin the right direction" though it added that the budgetproposals did not fully address the weaknesses of high subsidiesand poor revenue structure.

"We would have preferred more clarity on say fuel subsidiessuch as details and timelines," said Selena Ling, head oftreasury research at Overseas-Chinese Banking Corp in Singapore.

After securing his power base last weekend in ruling partyelections, Najib had appeared to have a freer hand to tackle ahigh fiscal deficit with unpopular steps.

But having trimmed fuel subsidies by 3.3 billion ringgit ($1billion) per year shortly the Fitch announcement, Najib onlypledged to gradually restructure the subsidy policy.

COOLING PROPERTY BOOM

The government's economic report, released just ahead of thebudget speech, said that spending on subsidies, including fuel,would total 39.4 billion ringgit next year, down from 46.7billion ringgit in 2013.

The abolition of the 0.34 ringgit per kg subsidy on sugarwas justified as needed to combat rising rate of diabetes.

In the report, the government maintained its commitment tosteadily cut the budget gap, from 4.5 percent in 2012 to 4.0percent in 2013 and 3.5 percent in 2014.

"We believe that the government has paid heed to increasingcriticism by markets and rating agencies, and has followedthrough after the aggressive fuel subsidy reduction inSeptember," Barclays Capital economists wrote in a note.

The economic report forecast a slight pick-up in GDP growthto 5.0-5.5 percent in 2014 from 4.5-5.0 percent in 2013,underpinned by strong domestic demand. The government expects tonarrowly stay within its self-imposed debt limit of 55 percentof GDP next year, forecasting a ratio of 54.7 percent.

To cool a surging property market, Najib announced that thecountry's property gains tax would be doubled to 30 percent forreal estate sold within three years. The minimum value of aproperty for foreign buyers was doubled to 1 million ringgit.

Malaysian property prices have risen by about a third in thepast three years, with even bigger rises in hot spots such asparts of southern Johor state.

The government forecast private investment would rise to17.9 percent of GDP in 2014, with funds going into oil and gas,textiles, transport equipment and real estate development.

Private investment remains well below levels seen in the1990s, when it averaged 22.9 percent of GDP annually, but it isrecovering from an average of 11.8 percent between 2001-2011. (Additional reporting by Anuradha Raghu and Niluksi Koswanagein Kuala Lumpur; Kevin Lim in Singapore. Writing by StuartGrudgings; Editing by Simon Cameron-Moore)

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