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Malaysia Fiscal November 2020

Malaysia: Government announces largest budget in history to address Covid-19 impact and spur economic growth

On 6 November, Finance Minister Tengku Zafrul Aziz presented the government’s 2021 draft budget. The expansionary plan envisions significantly higher public spending—the largest in history—and aims to address the harsh economic impact of the health crisis and lay the foundations for a strong recovery in 2021. Notably, the package foresees increased revenues on the back of higher tax collections due to the economy gradually recovering, and forecasts a lower fiscal deficit than in 2020, laying down plans for gradual fiscal consolidation until 2023. That said, much depends on the evolution of the pandemic and the government’s ability to execute its spending plans.

Spending for 2021 is forecast at MYR 322.5 billion (around USD 78.0 billion; 2020 revised figure: MYR 314.7 billion), an increase of around 8.5% relative to 2020’s original budget. Looking at individual spending areas, infrastructure spending is expected to receive a substantial boost as the government restarts key projects in a bid to revive construction activity. Moreover, health and social spending is also seen increasing, while the dedicated Covid-19 fund, established in mid-October and largely composed of wage subsidies, will receive lower financing as the pandemic’s impact recedes.

For its part, revenue is forecast to expand 4.2% in 2021 to MYR 236.9 billion (around USD 57.3 billion; 2020 revised figure: MYR 227.3 billion), mainly due to increased tax collection. That said, non-tax revenues are seen declining by 15.5% to MYR 62.5 billion, largely driven by lower dividend payouts from state oil firm Petronas.

The budget rests on a forecast of 6.5%–7.5% GDP growth in 2021 and estimates the fiscal deficit to decline to 5.4% next year—lower than 2020’s 6.0% projected figure. Both estimates are broadly in line with our panelists’ predictions—Consensus sees GDP growth of 6.6% in 2021 with a fiscal deficit of 5.3% of GDP. In addition, the budget envisages an average fiscal deficit of 4.5% for the 2021–2023 period, while public debt is forecast to reduce to 55% of GDP by January 2023, signaling the government’s commitment to fiscal consolidation.

Commenting on the budget, Julia Goh and Loke Siew Ting, economists at UOB, stated:

“Budget 2021 carries significantly more expansionary and inclusive measures to steer the economy out of a recession towards post-recovery growth under the new normal. [However], given the sizeable public outlay, efficient spending and execution remains key for the successful implementation of Budget 2021 measures to revitalise the economy.”

Building on this, analysts at Nomura noted:

“Despite the Finance Minister characterising the budget as expansionary during his speech, the smaller deficit shows that the government remains aware of the need to stay on a medium-term path of fiscal consolidation and avoid a credit rating downgrade.”

However, Prakash Sakpal, senior economist at ING, is one panelist who casts some doubt over the feasibility of the government’s fiscal deficit and GDP forecasts:

“The deficit as a proportion of GDP is targeted to narrow to 5.4% in 2021 from 6.0% this year. However, this hinges on projected 6.5-7.5% GDP bounce next year, up from about -4.5% contraction this year. These assumptions appear to be optimistic, given the continued local and global spread of the pandemic.”

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