INTERVIEW-S&P sees little Malaysia budget consolidation in 2010

* Sees Malaysia central govt deficit at 7.8 pct GDP in 2010

* Shortfall seen at 8.3 pct GDP in 2009

* Sees gross funding gap at $21.2 billion in 2010

* No chance of goods and services tax

KUALA LUMPUR, Sept 25 - Malaysia will not take any major action to rein in its surging budget deficit next year due to risks to economic growth in this export dependent Southeast Asian country, credit ratings agency Standard & Poor's said.

According to government forecasts, Malaysia will post a federal government budget deficit this year of 7.6 percent of gross domestic product, its biggest since 1987, although S&P believes the figure, boosted by additional spending, could be 8.3 percent of GDP.

The government is set to announce its 2010 budget plans on Oct. 23 but beyond vague promises to cut operational spending and use land sales to plug the gap, it has not set out any plans to curb the deficit. [ID:nKLR153444]

"We don't expect that that much in terms of fiscal consolidation in a short period of time," S&P credit analyst Takahira Ogawa told Reuters in an interview late on Thursday.

S&P rates Malaysia's local currency debt A-minus and has a stable outlook due to the country's deep financial markets and pension funds and its strong international reserves.

Ogawa said he expects the gross funding requirement for Malaysia in 2010 to be 73.3 billion Malaysian ringgit ($21.18 billion), roughly the same as this year.

"That's the total gap to be filled. A part of that may be filled by the use of the assets (sales)," he said.

Malaysia's huge bond domestic bond issuance needs as well as the global financial crisis and rising political risks in the wake of the 2008 election which saw the government that has ruled for 52 years fall to its worst ever poll result have pushed Malaysian yields out beyond those of neighbouring Thailand.

Malaysia's five year government bond currently yields <MY5YT=RR> 3.74 percent compared with 3.45 percent for Thailand, whose local currency debt is A-minus by S&P, the same as Malaysia.

Malaysia has been mulling a goods and services tax to try and diversify its revenue base but Ogawa said he did not expect the tax to be introduced in 2010 as it may hit economic growth, which S&P sees at 2.2-3.0 percent next year compared with a government forecast of a 4-5 percent contraction in 2009.

S&P expects the economy to contract by 3.2 percent this year.

"If you look at second quarter GDP, Malaysia is one of the weakest in the region," Ogawa said.

Malaysia exports are equivalent to around 100 percent of GDP and the country has been hit hard by the global economic downturn and its economy <MYGDP=ECI> contracted by 3.2 percent in the second quarter of 2009 from a year earlier.

As well as slow economic growth and falling exports which mean that the government will have to maintain spending, the ability of Malaysia's government to rein in the deficit is heavily constrained by domestic politics, S&P believes.

The National Front government replaced its lacklustre prime minister in April this year and the new premier Najib Razak has embarked on a series of economic reforms aimed at boosting foreign investment and growth.

Najib, whose approval ratings initially surged, has however seen his 13-party coalition hit by renewed infighting. [ID:nKLR491397]

"A year ago when (opposition leader) Anwar Ibrahim was threatening to take power it was more shaky," Ogawa said.