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Malaysia Fiscal October 2019

Malaysia: Malaysian government unveils prudent budget for 2020

On 11 October, the Malaysian government presented the 2020 budget, which aims to strike a balance between continuing fiscal consolidation efforts and introducing stimulus measures to buffer against a larger economic slowdown.

The 2020 budget includes a slower pace of fiscal consolidation than anticipated last year. Following the expected fiscal deficit of 3.4% of GDP in 2019, the government announced a narrower fiscal deficit target of 3.2% in 2020, which is wider than the prior projection of 3.0%, with a further reduction to 2.8% by 2021. FocusEconomics panelists are mildly skeptical of the government’s proposed belt-tightening, as conveyed in this month’s forecast of a slightly wider deficit of 3.3% in 2020 and 3.0% in 2021.

Stimulus measures include subsidies such as cash aid and a living cost aid for low income households, fuel subsidies, incentives to draw women into the workplace and a minimum wage increase to MYR 1,200 a month in main cities. Policies also focus on infrastructure projects including the Pan Borneo highway and promoting the transition towards a digital economy, with funds allocated to the development of high-speed internet connection in rural areas and building a 5G ecosystem. Moreover, policies seek to increase foreign investment and capitalize on shifting global supply chains caused by the U.S.-China trade war. Two such incentives are a 10-year tax break for companies in the electronics sector and a “special channel” for attracting FDI from China.

Expenditures are expected at MYR 297 billion in 2020, which is down 6.1% from the prior year’s budget of MYR 315 billion. That said, Minister of Finance Lim Guan Eng noted that the government stands poised to act with contingency measures should the external environment worsen. Policymakers aim to reduce operational expenses by MYR 21 billion, while increasing development outlays to MYR 56 billion in 2020.

The government expects revenue to fall 7.1% in 2020 to MYR 245 billion in the wake of a flagging economy. Dividend payouts from state oil firm Petronas will be cut to MYR 24 billion, after the firm doubled contributions in 2019 to boost government revenue. The budget introduces a new tax bracket for individuals earning above MYR 2 million with a tax rate of 30%. The government is also set to introduce a digital service tax, effective 1 January, on services such as online marketing and the downloading of software and media. The budget, however, did not reintroduce a goods and services tax, as some market analysts had anticipated.

Revenue estimates rest on the government’s assumption of 4.8% GDP growth next year, which is higher than FocusEconomics panelists’ average forecast of 4.3% growth. Moreover, the share of revenue from petroleum will depend on oil prices (the government assumes an average crude oil price of USD 62 per barrel). With heightened uncertainty surrounding the state of the global economy, the revenue projections are particularly vulnerable to an external shock to the oil price outlook. That said, an upside shock could have a positive knock-on effect.

Commenting on ANZ’s take on the recent budget, Sanjay Mathur states:

“The 2020 budget reaffirms the government’s commitment to fiscal discipline, in our view. […] At the same time, it represents a realistic compromise between responding to external headwinds to growth and the need to consolidate public finances. Assumptions underlying the fiscal projections, including GDP growth, global trade, and oil prices, appear reasonable implying limited scope for slippage.”

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