Will Malaysia's new economic model work?

Following is an assessment of the risks to the proposals that will be presented later this month and formally announced in June before becoming the 10th Malaysia Plan, an outline of how the country moves from developing nation to developed nation income status by 2020.

Introducing Goods and Services Tax

and Cutting Subsidies

Malaysia was supposed to cut its fuel subsidy bill from May this year as part of the 2010 budget to tackle its budget deficit which in 2009 hit a more than 20 year high of 7.4 percent of gross domestic product. That measure was withdrawn as it was “unpopular” with voters.

Similarly, plans to debate a goods and services tax (GST) in the current parliamentary session were withdrawn due to the risk of hurting the government's popularity as were proposals for electricity price hikes.

These measures are unlikely to be implemented before the next general election that must be held by 2013 at the latest, but could come in 2011.

An early election with early implementation by a government with a strong two-thirds majority in parliament would be positive for investors. If the government fails to win back the two-thirds parliamentary majority it lost in the 2008 polls, unpopular measures such as these could be delayed again.

There are no firm pledges on fiscal reform.

Economic growth targets are ambitious at 6.5 percent by some unspecified timeframe. In its “Vision 2020” drive to win developed nation status, then-premier Mahathir Mohamad projected 7 percent annual growth. The outcome from 1998-2008 was 5.5 percent. Malaysia is Asia's third most trade dependent economy relative to its size. Any targets could be rendered meaningless if there is a double dip global recession or if demand for commodities or oil declines.

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