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Economic Focus
Refer to important disclosures at the end of this report
Malaysia Economics Research 26 October 2020
Economist Budget 2021: Focus on caring amid pandemic woes
Manokaran Mottain +603 2604 3920
manokaran-mottain@alliancefg.com Economic recovery plans with stimulus packages to play a vital role in
2021
Isaac Chua +603 2604 3907
isaac.chua@alliancefg.com Expect fiscal deficit to widen 7.2% in 2020, before moderating to 6.2%
next year
Kirubha Sanmugam +603 2604 3915
kirubhas@alliancefg.com We anticipate GDP to decline 4.3% y-o-y in 2020; before rebounding
5.1% y-o-y in 2021
Executive summary
In our opinion, Budget 2021 that is scheduled to be tabled on 6 Nov, will be an expansionary
budget to provide a cushion for Malaysia’s economic growth in the event of unprecedented
headwinds arising from COVID-19 pandemic. The focus of Budget 2021 includes safeguarding
the welfare of the people, driving economic growth, enabling sustainable living and enhancing
public service delivery.
In 1H20, the Malaysian economy contracted 8.2% y-o-y (1H19: +4.7%) – registering the
largest decline since the Asian Financial Crisis in 1998, largely dragged by the bottoming of
GDP during the second quarter (-17.1% y-o-y). The sharp downturn was attributed to the
unprecedented measures taken by the government to contain the pandemic, especially
movement and travel restrictions, and forced business closures that had severely curbed
economic activities.
Nonetheless, domestic public spending continued to expand at 3.6% y-o-y in 1H20 (1H19:
+3.3%), largely attributed to the stimulus measures unveiled by the government to cushion
the economic downturn. We reckon that public spending will remain the main pillar of growth
in the upcoming quarters.
During the first half of the year, Malaysia’s external trade performance has been largely
affected by the disruption of the global supply chain, with exports and imports declining 5.8%
y-o-y and 6.3% y-o-y respectively (1H19: -0.4% y-o-y; -2.1% y-o-y). Moving forward, we
anticipate Malaysia’s external trade activities to remain susceptible to pandemic-induced global
supply chain disruptions despite the gradual normalisation in domestic economic activities.
On the interest rate front, the cumulative 125bps cut in Overnight Policy Rate (OPR) YTD by
Bank Negara Malaysia (BNM) has provided sufficient liquidity for the financial system and
impetus for the recovering economy to regain its pre-pandemic traction for now.
The main focus of these stimulus measures and policy actions is mainly to address the
concerns of income losses, job cuts and business closures during the crisis, various incentives
and initiatives have been introduced that include but not limited to cash handouts to B40 and
M40 household income groups, wage subsidy programme, loan moratorium, several tax relief
and exemptions as well as provision of grants and loans to the severely affected businesses.
According to the Ministry of Finance (MOF), the fiscal measures are expected to create a
multiplier effect on the domestic economy while contributing 3.7% to 4.0% of Malaysia’s
GDP in 2020.
Refer to important disclosures at the end of this report
ed: CK / sa: WMTEconomics Focus
Furthermore, downside risks arising from the recent resurgence of COVID-19 cases that has
led to the re-implementation of Conditional Movement Control Order (CMCO) in Malaysia’s
major cities (Kuala Lumpur, Putrajaya and Selangor), will weigh on the overall economic
outlook. Nevertheless, we anticipate full-year 2020 GDP to decline 4.3% and expect a gradual
recovery in 2021 of 5.1% y-o-y on the back of effective fiscal and monetary measures that will
help boost the economy.
From the various stimulus packages implemented earlier, it is known that RM55bn comes in
the form of direct fiscal injection. Consequently, this increases the total government
expenditure to RM346bn from its initial budget estimation of RM297bn (Budget 2020). On the
other hand, total government revenue is expected to decline to RM235.6bn compared to the
budget estimation of RM244.5bn on the back of potential loss in oil- and tax-related revenue.
As a result, fiscal deficit is anticipated to edge higher to 7.2% of GDP in 2020 (vs. budget
estimation: 3.2% of GDP).
GDP growth by sector and aggregate demand at constant 2015 prices (% y-o-y )
2019 2020 2020f
1Q 2Q 3Q 4Q Ove ra ll 1Q 2Q ADBS BNM
Real GDP 4.5 4.9 4.4 3.6 4.3 0.7 -17.1 -4.3 -3.5 to -5.5
Agriculture 5.8 4.2 3.7 -5.7 2.0 -8.7 1.0 -6.5 -
Mining -1.5 2.9 -4.3 -3.4 -2.0 -2.0 -20.0 -14.7 -
Manufacturing 4.1 4.3 3.6 3.0 3.8 1.5 -18.3 -2.9 -
Construction 0.4 0.5 -1.5 1.0 0.1 -7.9 -44.5 -6.1 -
Services 6.4 6.1 5.9 6.2 6.1 3.1 -16.2 1.0 -
Consumption
- Public 6.3 0.3 1.0 1.3 2.0 5.0 2.3 8.3 -
- Private 7.7 7.8 7.0 8.1 7.6 6.7 -18.5 -0.8 -
Investment
- Public -13.7 -7.8 -14.6 -8.0 -10.8 -11.3 -38.7 -3.6 -
- Private 0.6 1.5 0.4 4.3 1.6 -2.3 -26.4 -7.6 -
Exports 0.1 0.5 -2.1 -3.4 -1.3 -7.1 -21.7 -8.6 -
Imports -1.6 -2.3 -3.5 -2.4 -2.5 -2.5 -19.7 -7.7 -
- Net exports 13.0 32.9 12.0 -12.4 9.7 -37.0 -38.6 -16.4 -
Source: BNM, AllianceDBS
- BNM forecast breakdown not available
Page 2Economics Focus
Budget 2021 to remain an expansionary budget
No thanks to economic devastation wrought by the COVID-19 Classification of government domestic debt (2Q20)
pandemic, the country appears to be in dire need of
government support. The current government has been 3.3% 3.0%
repeatedly emphasising that the upcoming budget will
concentrate on supporting the economic vulnerable groups,
assisting industries through various stimulus measures,
empowering service delivery and preventing the B40 group Treasury bills
from falling into poverty by providing a strong safety net. Thus 42.7%
Govt. investment issues
far, the government had announced various economic stimulus Govt. securities
51.0%
packages (PRIHATIN and PENJANA packages) worth an estimate Other loans
RM305bn; of which approximately RM50bn will be directly
injected by the government.
Besides, the government has also announced the lifting of the
self-imposed debt limit/ceiling from 55% to 60% of GDP, in Source: Department of Statistics, AllianceDBS
response to the huge expenses needed to cushion against the
on-going economic downturn. Federal government debt service charges
Debt service charges (rhs) % of total revenue (lhs)
As of 2Q20, federal government debt stood at 59% of total RM mn
21% 10,000
GDP or RM854.1bn (2019: 52.5% of GDP, RM793.0bn), of
9,000
which 24% pertains to external debt. The rise in the debt-to-
18% 8,000
GDP ratio was partly caused by the drastic decline in second 7,000
quarter GDP. In terms of growth, government borrowings 15%
Debt service charges limit 15%
6,000
expanded 6.9% y-o-y during the quarter (2Q19: +10.2% y-o-y; 5,000
RM799.1bn). 12% 4,000
3,000
We reckon the reopening of businesses during the second half 9% 2,000
of the year would marginally improve the GDP numbers, in turn 1,000
giving rise to more borrowing space for the government to 6% 0
1999
2000
2001
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2012
2013
2014
2015
2016
2017
2018
2019
2020
further boost the economy, taking into account the debt-to-
GDP ceiling threshold. Source: Ministry of Finance, AllianceDBS
YTD-June debt service charges amounted to RM16.8bn, which
grew 7.6% y-o-y (2019: RM32.9bn, +7.8% y-o-y). According to Government total debt outstanding (domestic and
foreign %)
the federal government’s self-imposed debt legislative
Domestic debt External debt Total debt (rhs) RM bn
guidelines, to maintain the path of fiscal consolidation towards 100% 900
balanced budget; the debt service charges should not exceed 90% 800
15% of the total revenue collection. YTD-June debt services 80% 700
charges had already exceeded to 16.5% of total revenue (2019: 70%
600
12.5% of total revenue). We foresee the debt service charges 60%
500
50%
will continue to exceed its self-imposed limit in the short-run 400
40%
given the challenging economic environment. 300
30%
20% 200
This is partly due to the significant revenue losses in government 10% 100
revenue collection (1Q20: -28.8% y-o-y; 2Q20: -9.1% y-o-y); 0% 0
amid the government’s initiatives to reduce the burden for
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
business owners and individuals, coupled with business closures
to contain the pandemic. Source: Ministry of Finance, AllianceDBS
Page 3Economics Focus
Fiscal deficit to moderate in 2021
According to Budget 2020, the government had expected total Nevertheless, we expect the government to remain committed
revenue to increase by 4.8% y-o-y to RM244.5bn (2019: to its fiscal consolidation and gradually ratchet down the fiscal
RM264.4bn) after excluding the one-off special dividend deficit to 6.2% of GDP next year, on the back of the country’s
collection from PETRONAS in 2019 and assuming Brent crude eventual success in overcoming the pandemic-induced crisis,
oil prices to average USD62 per barrel. with a rebound of economic activities of around +5.1% y-o-y,
coupled with an enhanced tax revenue base and streamlined tax
Government revenue collection has been adversely impacted administration.
largely due to the plunge in global crude oil prices, coupled with
the financial relief measures introduced under the PRIHATIN and
PENJANA packages amid the COVID-19 pandemic.
In our estimation, revenue loss in direct tax revenue is
Government 2020 fiscal position estimation (previous
unavoidable – largely dragged by the financial relief measures
budget vs. AllianceDBS)
such as the exemption of income tax payment, stamp duty and
Real Property Gain Tax (RPGT) that were introduced as a part of Initial Budget AllianceDBS
the stimulus package and economic recovery plan. 2020 fiscal position
2020 estimation estimation
Based on the announcement made by Prime Minister, the RM mn RM mn
exemption of stamp duty is expected to cost the government Total Revenue 244,530 241,556
RM1bn in lost revenue while the 6-month period exemption for (-) Total Expenditure 297,020 346,020
RPGT is likely to wipe off about RM842m from the total direct (+) Loan recovery 766 766
tax revenue. Our estimation also shows that other tax relief and Overall balance (51,724) (103,698)
exemptions would cause a loss of approximately RM1.1bn from Fiscal balance (% of GDP) (3.2) (7.2)
the expected revenue collection in 2020.
Source: Bloomberg, AllianceDBS
As of end-1H20, BNM reported that total government revenue
amounted to RM101.7bn (1H19: RM125.8bn), which is
equivalent to 41.6% of the total expected revenue collection in
2020. After accounting for the potential loss in revenue due to
tax relief measures (-RM3.0bn), we foresee the government’s
total revenue collection declining to RM241.6bn as compared to
the previous budget estimation of RM244.5bn back in 2019.
On the expenditure side, as of end-1H20, total expenditure
expanded 4.3% y-o-y to RM154.5bn (1H19: +7.7% y-o-y;
RM148.2bn). The higher government expenditure was mainly
attributed to stronger development spending that grew 16.7%
y-o-y to RM27.3bn (2Q19: +18.2% y-o-y; RM23.4bn), due to
the higher funding required for stimulus measures to cushion
against the economic impact caused by the pandemic.
With total expenditure expected to increase to RM346.0bn by
the end of the year (previous estimation: RM297.0bn), we
foresee the government’s budget deficit reaching RM103.7bn in
2020. To recap, as of end-2Q20, Malaysia’s fiscal deficit stood
at 8.2% of total GDP, on the back of weaker government
revenue collection, higher spending under development
expenditure and weak GDP performance during the first two
quarters.
Hence, fiscal deficit is projected to edge higher to 7.2% of GDP,
in view of Malaysia’s 2020 GDP registering a sharper
contraction of 4.3% y-o-y. This is higher than the government’s
official fiscal deficit target range of 5.8% to 6.0% of total GDP.
Page 4Economics Focus
Malaysia GDP and private consumption growth Fiscal deficit (govt. estimation vs. AllianceDBS forecast)
y-o-y % GDP growth Private consumption (rhs) % y-o-y Fiscal balance RM bn (lhs) Fiscal Balance (%)
RMbn % of GDP
10.0 15.0 0.0
-3.0
5.0 10.0 -20.0
5.0 -4.0
0.0 -40.0
0.0 -5.0
-5.0 -60.0 -6.0
-5.0
-80.0 -6.0
-10.0
-10.0
-100.0 -7.0
-15.0 -15.0
-7.6
-120.0 -8.0
-20.0 -20.0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019e
2020f
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
Source: Department of Statistics, AllianceDBS Source: Ministry of Finance, AllianceDBS
Federal government revenue and expenditure growth Federal government total revenue and expenditure
% y-o-y Revenue Operating ex. Development ex. RM bn Total revenue Total expenditure
110 100
GE15 and 90
90 reimplementation of
mega infrastructure 80
70 projects 70
60
50
50
30 40
30
10
20
-10 10
0
-30
Sep-17
Sep-18
Sep-19
Jun-17
Jun-18
Jun-19
Jun-20
Mar-17
Dec-17
Mar-18
Dec-18
Mar-19
Dec-19
Mar-20
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Mar-15
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20
Source: BNM, Ministry of Finance and AllianceDBS Source: BNM and AllianceDBS
Page 5Economics Focus
Budget 2021 Wish List
We anticipate that the upcoming Budget will be an Prior to this, BNM has rolled out three issuances of Malaysia
expansionary budget. We reckon the government would initiate Savings Bonds and Merdeka Savings Bonds, whose subscription
or extend the following policy measures to cushion against the was limited to retirees aged 55 years and above, and those who
on-going economic downturn amid the pandemic as well as to are not employed on a full-time basis. The bond offers an
sustain Malaysians’ standard of living. The following is our wish annual coupon rate range of 5% to 5.75% with a maturity
list for the upcoming Budget. period of two to three years, with the last issuance made in
2009.
Extending direct cash assistance
Hence, we reckon that BNM could raise similar debt instruments
Given the heightened uncertainties arising from the COVID-19 by offering a relatively longer tenure and higher coupon rate.
pandemic and its potential impact on vulnerable groups that is Besides, the targeted group should not be limited to retirees,
likely to persist in the absence of a vaccine, we expect the and should instead include a larger segment of domestic
government to extend its direct cash assistance such as Bantuan investors. Despite the easing of cash flow constraints, the
Prihatin Nasional (BPN) and Wage Subsidy Programme (WSP) reissuance of a savings bond is also expected to reduce
into 2021. Malaysia’s external debt ceiling.
The BPN cash handouts to B40 and M40 households had cost Resumption of mega infrastructure projects
the government RM18bn on top of the existing Bantuan Sara
Hidup (BSH) aid, thus benefiting 10.6m recipients. We expect The allocation for subsidies and social assistance will not sustain
the temporary relief provided by the government to be in the long run, as this can only weaken government coffers
continued further in 2021 to alleviate the financial burden ofand lead to the pile-up of debt. Major public infrastructure
affected individuals and households. projects will have a high-multiplier impact on the economy,
stimulate he job market and ensure the well-being of the
WSP is largely expected to be extended into 2021 to deal with people.
the on-going unemployment woes. So far, the programme has
benefited 2.6m individuals and 322,022 companies with a total We reckon the revival and acceleration of some existing public
provision of RM12bn as of 2 Oct. infrastructure projects such as the Mass Rapid Transit line 3
(MRT 3), High Speed Rail (HSR), Light Rail Transit line 3 (LRT 3),
The government is also expected to extend some other financial ECRL, Pan Borneo Highway, etc. could significantly spur
reliefs such as utilities discount and rental exemptions for the economic benefits and most importantly make up for job losses
most vulnerable groups, alongside the new measures to in other sectors.
improve domestic consumption in the medium term. As such,
spending on social assistance is likely to remain significant in
In fact, as of end-2Q20, the government’s development
2021. spending on important subsectors has declined in response to
the immediate spending required for social assistance and
Enhancing tax revenue base various stimulus measures, with subsectors such as trade and
industry shrinking 55.9% y-o-y, transport (-37.9% y-o-y),
As the government looks to expand its tax revenue base in the education (-31.7% y-o-y) and health subsectors (-13.4% y-o-y).
upcoming budget, we expect the government to widen the
scope of good and services being subject to SST in 2021. It is We reckon the public infrastructure projects could be part
vital for the government to adjust its tax system in order to supported and funded by public-private partnerships; or
ensure sustainable funding and growth for the country. At this through re-evaluation and monetisation of government’s
juncture, there are only around 100,000 companies in Malaysia existing assets.
which is required to pay SST compared to 472,000 under GST
administration previously. By widening the scope, the
government may be able to compensate for at least half of the
lost revenue from the collection of SST. (2019 SST collection:
RM27.7bn vs. 2017 GST collection: RM44.3bn).
Re-issuance of savings bond
We expect MOF to announce the reissuance of “Malaysia
Savings Bond” or “Merdeka Savings Bond” during the tabling
of Budget 2021 – primarily to boost the government’s liquidity
as well as to mitigate the adverse impact of a low interest rate
environment, especially on the income earned on deposits.
Page 6Economics Focus
2020 Economic Stimulus Packages
PRIHATIN stimulus package
Initiatives Description Amount
People Welfare
One-off cash assistance for households with income less than RM4,000 RM1,600 each
One-off cash assistance for households with income RM4,001-RM8,000 RM1,000 each
Bantuan Prihatin Nasional (BPN)
One-off cash assistance for single individuals with income less than RM2,000 RM800 each
One-off cash assistance for single individuals with income RM2,001-RM4,000 RM500 each
Wage subsidy 3 months wage subsidy- eligble for employers with 50% drop in business since Jan20, workers with salaryEconomics Focus
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