Putting nation’s financial back on track

The new govt is now targeting the deficit to be 3% based on the 5-year development plan’s end in 2020 and the revised forecasts set the stage for an austerity budget


Malaysia’s new government is set to unveil the 2019 budget tomorrow, the administration financial blueprint for next year, as Putrajaya works to ensure growth but deficit does not balloon.

The budget presentation will be closely watched as one of the many firsts since Pakatan Harapan formed the government in May. It is the first time the federal budget will be tabled by a non-Barisan Nasional government in 60 years.

Adding to that, it will be done by the country’s finance minister, first time in 17 years, a post not helmed by the prime minister.

As the government has been tirelessly finding ways to subside the country’s already mammoth debts, all eyes will be on — potentially spar-king panic on the financial markets — government’s ways of balancing the country’s fiscal debt and implementing Pakatan Harapan’s populist promises.

Budget 2018 tabled last year aimed to bring down fiscal deficit to 2.8% of GDP.

However, a year later, the 11th Malaysia Plan (11MP) midterm review released on Oct 11, 2018, stated that “the fiscal deficit is expected to temporarily be beyond the target set
during the last budget”.

The new government under Tun Dr Mahathir Mohamad is now targeting the deficit to be 3% based on the five-year development plan’s end in 2020, and the revised forecasts will set the stage for austerity budget.

For economic growth, the government is projecting growth of between 4.5% and 5.5% annually for 2018-2020. The former government had envisioned in 2015 growth as high as 6% per annum over the five years.

Critical Consensus; Fiscal Constraints

Analysts expect an increase in deficits may impact Malaysia’s sovereign credit ratings. Rating agencies had warned that the country could take a hit if the government fails to narrow the budget deficit.

Given that Malaysia’s budget has been in deficit since 1998, the country’s fiscal challenges remain daunting noting that there is a target of attaining a balanced budget by 2023, the year that the World Bank expects Malaysia to achieve the high-income nation status.

The abolishment of the Goods and Services Tax (GST) would leave a big hole in the government coffers. Its replacement, the Sales and Services Tax (SST), wouldn’t be able to plug the gap.

While this would mean no increase in corporate and individual income tax, the government has given some thoughts on broader tax reforms, namely introducing the inheritance tax, capital gain tax, or even new taxes on soda and e-commerce.

The near-term objective of the new government is to consolidate public debt, which it believes to be higher than official debt indicators suggest.

It plans to review infrastructure projects entered into by the previous administration to cut its financial outlay by billions of ringgits.

However, while it is trying to curb government spending on medium-to long-term projects, it will also implement measures that will swell the size of the budget deficit.

Kenanga Investment Bank Bhd (Kenanga Research) in its Budget 2019 preview report said even if the government introduces new taxes, reduces operating expenditure, sells non-core assets and banks on high oil and gas, the research arm expects it may still be challenging to reduce the size of the fiscal deficit.

“As in any transitional period, the new government is expected to face some hurdle and setback that could delay the smooth implementation of any policy adjustment made.

“The total deficit for this year could be much bigger if we include refunds owed to companies and individuals from GST, real property gain tax and income tax which cumulatively amount to almost RM36 billion,” the research arm said, adding that it expects the government to settle most, if not all, of the refunds within five years.

“Along with the slower growth outlook, we would expect the fiscal deficit to widen and breach 3% of GDP for both this year and 2019, despite some improvement and a slight reduction of deficit for next year,” it said in the report.

Lim says the upcoming 2019 budget would be a ‘difficult’ one (Pic by Hussein Shaharuddin/TMR)

Finance Minister Lim Guan Eng had said the upcoming 2019 budget would be a “difficult” one.

Kenanga Research believes it is enough to confirm that the government is committed to fix the mess left by the previous administration.

“This means the new government would have to undertake a herculean task to fix its balance sheet and at the same time steer the economy out of an impending economic slowdown in the coming years,” it added.

Kenanga Research’s base-case budget deficit forecast for this year is 3.1% of GDP, far higher than the official deficit target of 2.8%.

“Our best-case projection would only see the deficit reaching 2.9%, assuming the government would front-load the tax refunds instead of spreading it evenly over subsequent years and economic growth exceeding 5%.

“In a worst-case scenario, the deficit would likely hit 3.4% of GDP,” it added.

Maybank Investment Bank Bhd’s (Maybank IB) group chief economist Suhaimi Ilias expects the 2019 budget deficit to remain above 3% of GDP at 3.5%, but down from her research firm’s estimate of 3.7% in 2018.

“This is based on the impact of net consumption tax revenue loss from GST abolition and its replacement by SST, the RM35.25 billion tax refunds and unbudgeted costs such as 1Malaysia Development Bhd’s debt servicing.

“Market will be looking for details on how to bring the deficit back to 3% of GDP by 2020 as targeted under the 11MP (2016-2020) midterm review,” Suhaimi said.

JPMorgan analyst Mak Hoy Kit believes the potential fiscal flex is likely to be accompanied by clear communication of the medium-term fiscal consolidation roadmap in the upcoming tabling of Budget 2019 tomorrow, or communications with the rating agencies.

However, Affin Hwang Capital Research estimates the government to record a fiscal deficit of 3.3% of GDP in 2019.

“As for this year, a 3.6% fiscal deficit is expected, higher than the government’s target of 2.8%,” it said in its Budget 2019 preview report.

CIMB Research also expects the country to see a short-term deviation away from its fiscal deficit target.

Nonetheless, it said missing the fiscal deficit target does not mean the country’s fiscal consolidation plan is aborted.

Under its base-case scenario, CIMB Research forecasts Malaysia’s budget deficit to widen to 3.7% of GDP in 2018 and 3.5% of GDP in 2019, due to the recognition of large, one-off goods and services tax and income tax refunds totalling RM34 billion.

Incentives for Affordable Housings and SMEs

Maybank IB believes Budget 2019 will focus on affordable housing as well as supportive of small and medium enterprises (SMEs), productivity and technology adoption.

“Budget 2019 can be expected to kick start and roll out initiatives and targets on affordable housing under 11MP and the National Housing Policy 2.0.

“Despite the ongoing issue of property oversupplies, we are not expecting any relaxation of macro prudential measures on the property sector,” it said.

In regards to that, PropertyGuru Malaysia proposes the government to provide Malaysians with greater access to financial information, whereby more organisations should come up with a quicker and more convenient credit checking facilities to accurately assess their debt service ratio and eligible mortgage amount (maximum loan eligibility).

The online property portal also proposes for more land for development, given that land scarcity has become a key contributory factor to rising home prices, especially in urban areas.

“Opening up more government reserve land for development with all land sales to be conducted via an open tender.

“At present, only a fraction of affordable home projects are built on government or state-owned land,” it said.

Other proposal for the government includes revising interest rates for home loans and reducing upfront costs for home purchase.

PropertyGuru recommends a reduction of 0.5%-1% off interest rates for first-time homeowners buying affordable properties within a specific price range.

This could be homes under public sector affordable home schemes such as Rumah Selangorku, PPAM (Malaysia Civil Servants Housing Programme), or PR1MA (1Malaysia Housing Programme), or even open to affordable homes built by private developers.

In addition to end-financing, PropertyGuru also suggests reducing the upfront costs associated with a home purchase — which include legal fees and stamp duties for the purchase of affordable homes.

The 2019 budget will not just be a financial blueprint, but a roadmap, at times a difficult pill to swallow, to correct many wrongs of the past.