Malaysia PM Vows Big Budget Cut, Fails To Detail - 19:12 23Oct09 RTRS-WRAPUP 2

* Budget deficit target 5.6 pct/GDP in 2010 vs 7.4 pct in 09 * Subsidies to be cut by 14.7 pct in 2010, but tax cuts too * GDP to rise 2-3 pct in 2010 after falling 3 pct in 2009 * Bigger-than-expected deficit cuts positive for bonds/FX * Moody's "strong confidence" in budget, Fitch more sceptical

By Razak Ahmad

KUALA LUMPUR, Oct 23 (Reuters) - Malaysia's prime minister unveiled his maiden budget on Friday, promising to slash the 2010 deficit from its highest level in more than 20 years, although he provided few clues as to how the cuts would be realised.

Najib Razak, who is also finance minister, told parliament the budget deficit would fall to 5.6 percent of gross domestic product in 2010 from a forecast 7.4 percent this year in a move that is seen boosting domestic bonds as issuance slows.

The ringgit and bonds rose modestly on the government's intention to rein in a budget deficit that has more than doubled since 2007 as a proportion of GDP. But with few details on spending cuts or new revenue streams, some economists were sceptical the target could be met.

"It is good that we see now the government seems serious to address the budget deficit issue," said Azrul Anwar Ahmad Tajudin, senior economist at Bank Islam. "But the problem is whether we can achieve it or not. It's too huge a reduction." The main spending cuts would come from reduced "operating expenditure", lower food and fuel subsidies, a sensitive political issue for an unpopular government, and less money for development spending.

At the same time there were promises of lower taxes with 1 percentage point to be lopped off the top 27 percent income tax rate and a vague commitment to study a goods and services tax, which economists say is need to expand the tax net.

"In approach I would not see any major departure in his (Najib's) approach to previous prime ministers," said Khoo Kay Peng, an independent political analyst. "We see the usual tiny populist giveaways alongside catching-up measures." Najib became premier in April to try to rescue the fortunes of the National Front government that in 2008 stumbled to its worst ever losses in over 50 years of rule in national and state elections and alongside promises to privatise state companies, his budget also showed political pressures.

FEW REFORMS

The budget allocated 11 percent more money for state workers' salaries in 2010, nearly one million people accounting for almost 10 percent of voters and a mainstay of government support. While Najib has liberalised some sectors of the economy and chipped away at rules giving ethnic Malays preferential economic treatment, there were few reforms on Friday."The most controversial issue is likely to be the government's method of achieving the target without significant cuts in government headcount or salaries," said David Kiu, an analyst with Eurasia Group, a political risk consultancy.

Economists warned that while the targets appeared ambitious, Malaysia's recent history of budget overshoots since 2007, during the global economic boom in which the country benefitted from high oil and commodities prices, meant delivery on the promised cuts would be watched closely.

The main spending cuts come from: 1. reduced operating expenditure, seen down by 13.7 percent in 2010 at 138.3 billion ringgit ($40.72 billion); 2. lower development spending, seen down 4.5 percent to 50.6 billion ringgit; 3. Further reductions in food and fuel subsidies which are seen falling 14.7 percent in 2010 to 20.9 billion ringgit. CONFIDENCE, DETERIORATION

The budget plans, obtained by Reuters on Thursday, drew a mixed reaction from credit ratings agencies, although they boosted both the ringgit currency and Malaysian bonds. The ringgit gained 0.6 percent to 3.38 per dollar while the yield on the 3-yr debt fell 1 basis point (bps) to 2.90 percent and the 5-yr yield dropped 3 bps to 3.83 percent.

While Moody's Investors Service said it had a "strong degree of confidence" in the government's ability to deliver on its budget promises, rival Fitch said that the planned deficit would merely "stem the deterioration" seen in recent years. "We would be looking at how the fiscal adjustments will be taking place and whether the measures are one-off or not," said Fitch credit analyst Ai Ling Ngiam.

While Malaysia's banks have remained strong during the economic crisis that brought many of the world's giants to their knees, its export dependent economy has been hit hard.

The government forecasts that exports in Asia's third most trade-dependent economy will fall 20 percent this year and grow by just 5.3 percent in 2010. That means the economy will grow by just 2-3 percent in 2010 after an expected contraction of 3 percent this year, a far cry from the 6 percent growth that Najib wants to achieve.

The government has tried to boost domestic demand with extra spending and loan guarantees worth 67 billion ringgit spread over 2009 and 2010. Najib said recently that additional government spending was running at a billion ringgit a month. ($1=3.396 Malaysian Ringgit)

(Additional reporting by Liau Y-Sing, Soo Ai Peng, Julie Goh, Niluksi Koswanage, Loh Li Lian, Umesh Desai and Jun Ebias in HONG KONG and Kevin Yao in SINGAPORE; Writing by David Chance; Editing by Neil Fullick)