Malaysia economy "turns the corner"; fiscal reform to be gradual

PUTRAJAYA, Malaysia (Reuters) - Malaysia's economy has passed the turning point in its drive to reach high-income status by 2020, the head of the government's economic performance agency said, but politically sensitive fiscal reforms will only be pushed through gradually.

Idris Jala, the colorful chief of the 16-month-old Economic Transformation Programme, said that a 19 percent jump in private investment last year was among clear signs that the plan to double per-capita income to $15,000 was paying off.

"I think Malaysia has turned the corner," Jala, a former chief executive of Malaysia Airlines and now a minister in Prime Minister Najib Razak's government, told Reuters in an interview.

Tapped by Najib after four successful years at the helm of Malaysia Airlines, Jala has become one of the country's most influential policymakers as he leads the shake-up of the economy, the government and the system of privileges for majority ethnic Malays that has become a source of corruption.

A Christian who enjoys an occasional beer and plays blues guitar, Jala stands out in the conservative and overwhelmingly Muslim Malay government circles. His outspoken style and reformist zeal have made him unpopular in parts of the bloated civil service, sources say. Some leading politicians in the ruling coalition have sniped at him.

AVOIDING A TRAP

The ambitious economic transformation programme, or ETP, aims to channel $444 billion in mostly private investments to high-growth areas in a concerted effort to break Malaysia out of the dreaded "middle-income" trap and years of relatively disappointing growth. It includes structural reforms aimed at boosting competitiveness, government efficiency and reducing the state's heavy hand in the economy through divesting stakes in 33 companies.

Najib announced the first "report card" of the ETP on prime-time television two weeks ago, trumpeting the jump in companies' investments to 94 billion ringgit ($30.7 billion) last year, as he prepares to call an election as early as May.

Low private investment has been a chronic problem for Malaysia in recent years, rising by an annual average of 6.7 percent between 2000 and 2010. Of 131 projects aimed at kick-starting growth, 72 have been launched with total committed investments of 179 billion ringgit and planned creation of 313,741 jobs.

But Jala, who was hailed for leading revivals at Malaysia Airlines and Shell's Malaysia operations, said reforms to reduce the country's chronic budget deficits would only be pushed through over 5-7 years due to public resistance to subsidy cuts.

The forthcoming election would not affect the pace of those reforms, he insisted, amid speculation that Najib is waiting until after the polls to introduce painful cuts to fuel subsidies that the prime minister has described as economic "opium."

NEED A 'BALANCING ACT'

"We are monitoring the situation," Jala said at his office in the administrative capital Putrajaya. "You need to do the balancing act. Inflation rose last year and we need to deal with that. We need to make sure we can tackle that and equip the bottom 40 percent of people that are feeling the distress."

A planned new goods and services tax aimed at broadening the country's tax base and reducing the government's heavy reliance on oil revenue was also on hold because the public needs to be "educated" more about the change, Jala said.

Critics of the ETP have said it is little more than a re-packaging of projects that would have been done anyway. Investors also have doubts about the staying power of the programme in a country with a history of grand plans that have had disappointing execution.

Jala, a 53-year-old who was born into the indigenous Kelabit tribe in a village without electricity on Borneo island, insists the ETP is a radical new departure. Rather than a vague plan, it is a detailed programme that holds ministers' "feet at the fire" if they fall short of their targets, he said.

"We actually have a programme not a plan," the energetic Jala continued, occasionally rising from his seat to illustrate his points on a large whiteboard. "My experience in the government is that if you are clear and very detailed about the programme the civil servants run and do it."

BREAKING THINGS DOWN

"There is no breakthrough without breakdown. You need to break down the status quo," said Jala, who took Malaysia Airlines from a record loss to a record profit in two years.

Take Jala's move to cut by half the 761 varieties of licenses that Malaysia made business start-ups of different types obtain. That had upset bureaucrats whose job is to administer licenses but was a crucial step toward raising the country's competitiveness, Jala said.

He claimed that 37 percent of investments in the oil and gas sector since 2010 had come about because of incentives under the ETP, rejecting criticism that the programme was just a repackaging exercise. Many other sectors would have seen slower investments without the programme, he said.

Jala said the government had made a "good start" but still had more to do on the thorny issue of reforming affirmative action policies for Malays that favor a well-connected few and which have alienated minority Chinese and Indians.

Najib has committed to making the benefits more needs-based and less open to abuse, but there is been stiff resistance to change from within the ruling United Malays National Organisation (UMNO) party.

"Rome was not built in a day," Jala said.

(Additional reporting by Niki Koswanage; Editing by Richard Borsuk)

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