NATIONAL BUDGET 2023 PREVIEW - 6 October 2022 FIRDAOS ROSLI NOR JANNAH ABDULLAH RAJA ADIBAH RAJA HASNAN
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NATIONAL BUDGET 2023
PREVIEW
6 October 2022
FIRDAOS ROSLI
NOR JANNAH ABDULLAH
RAJA ADIBAH RAJA HASNAN
Section 1
The importance of Budget 2023
2
Strictly private and confidentialBUDGET 2023: WEATHERING THE STORM AMID
HEIGHTENED FISCAL PRESSURE
• Budget 2023 will be expansionary – The national budget for 2023 will be tabled on 7 October. We
expect Budget 2023’s total budget allocation to come in higher between 2.0-2.5% than in 2022.
Against this backdrop, the fiscal deficit would be lower at circa 5.8-6.0%, with GDP growth in the
range of 4.0-5.0%. Inflation remains manageable at 2.1%, while unemployment trends at around
3.5%.
• Budget 2023 is the final national budget cycle in the present political cycle. The ruling
coalition had announced that GE15 would be called by this year. Considering the parliament will
automatically dissolve in mid-July 2023, Budget 2023 will endure greater public scrutiny as it is the FOCAL PRIORITIES
final budget in the present mandate.
• Growth headwinds abound in 2023 – All multilateral development banks are projecting that global
growth will moderate in 2023 amid the strong US Dollar environment, elevated commodity prices,
and supply-side constraints. Although Asia, in particular Southeast Asia, is expected not to suffer as
badly as advanced economies would in the coming next year, the government is wary about the
1 Rakyat 3 Economy
contagion effect on the Malaysian economy. Hence, we expect the government to offer rakyat-
centric incentives for the labour market to recover gracefully in the post-pandemic era.
2 Business 4 Government
• It sits in the middle of the 12thMalaysia Plan (12MP) – While keeping the fiscal constraints and
growth headwinds in check, the government is likely to realign the present economic trajectory on
track with the 12MP targets. Thus, we expect reforms in the pipeline. Since the 12th Malaysian Plan
(12MP) mid-term review report will be unveiled in a year, Budget 2023 should recalibrate policies
towards the sustainability agenda, particularly in climate change and bridging the development
gaps between states and regions, inter- and intra-racial divides as well.
3
Strictly private and confidentialSection 2
Reduce fiscal pressure
4
Strictly private and confidential1. EFFORTS TO REDUCE FISCAL PRESSURE
Tax Revenue & Non-Tax Revenue, % of GDP Direct & Indirect Tax, % of GDP
18.0% 14.0%
16.0% 12.0%
14.0%
10.0%
12.0%
10.3% 7.6%
8.0%
10.0%
8.0% 6.0%
6.0% 4.0%
3.8% 2.6%
4.0%
2.0%
2.0%
0.0%
0.0%
Direct Tax Indirect Tax
Non- Tax Revenue Tax Revenue
Sources: CEIC, MOF, Bank Islam
• Tax revenue-to-GDP has been declining since 2012. • The Goods and Services Tax (GST) repeal disrupted efforts to shift
• Although post-GFC fiscal consolidation efforts successfully reduced the tax incidence from direct to indirect tax.
the reliance on non-tax revenue, it has been trending higher since • The government needs a more stable tax system as the economy
2018. In turn, Malaysia is now more susceptible to changes in global grows.
oil prices. • We expect the government to bring us closer to the reintroduction of
5 • We would like to see efforts in addressing its tax buoyancy. GST.
Strictly private and confidential1. EFFORTS TO REDUCE FISCAL PRESSURE
Debt service, RM Billion Expenditure: Subsidies, RM Billion
16.3
40 18% 90
35 16% 80 80
30 14%
70
12%
25
10% 60
20
8% 50
15
6% 40
10 4%
30
5 2%
0 0% 20
2013 2014 2015 2016 2017 2018 2019 2020 2021 10
Debt service (Domestic) 0
Debt service (External)
Debt service charges (%Revenue), RHS
Sources: CEIC, MOF, Bank Islam
• On the expenditure side, the hot-button issue lies in debt service • We anticipate that the government’s move to boost subsidies amid
charges and subsidies. Pandemic-induced spending pushed the growth headwinds is justified. Higher subsidies keep inflation in
debt ceiling twice since 2020. As a result, the debt service has check while economic and border reopening allows economic
breached the 15% administrative level in 2021. activities to return to their pre-pandemic levels gradually.
• External debt service remains very low amid a low level of foreign • As fuel takes the largest percentage of subsidies, we expect the
currency borrowings. In mitigating this issue, we believe that the government to rationalise subsidies by introducing a targeted fuel
government should improve the revenue side of the budget. subsidy system or returning to the monthly/weekly retail pricing of
6
petroleum products. Strictly private and confidential1. EFFORTS TO REDUCE FISCAL PRESSURE
Debt Outstanding (MGS, GII & MITB) to GDP, % GDP vs. Federal Government Debt
70.0% 61.6% 20.0% GDP and Federal Government
Debt is highly correlated by more
60.0% than 90%.
15.0%
Statutory Debt Limit of 65% 11.4%
50.0%
10.0% 9.0%
40.0%
5.0%
30.0%
0.0%
20.0%
-5.0%
10.0%
-10.0%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
1H2022
9M2022
GDP, y-o-y% Federal Government Debt, y-o-y%
Sources: CEIC, BNM, Bank Islam
• Pandemic-induced spending continues amid an anaemic labour • As growth headwinds abound in 2023, we expect the government to
market. As of 1H2022, we believe that the statutory debt-to-GDP is outline a clearer picture of turbo-boosting growth in the coming year.
reaching 65% ceiling. • Immediate GDP-enhancing effort is key in keeping the debt-to-GDP
• We expect the statutory debt ceiling to remain as is, as the latest ratio within the current statutory limit of 65%.
economic indicators are pointing towards solid GDP growth in 2022.
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Strictly private and confidentialREDUCING FISCAL PRESSURE IS PARAMOUNT AS
MALAYSIA APPEARS WEAKER THAN ITS RATED PEERS
Fiscal balance, % GDP Debt service, % GDP
2013 2014 2015 2016 2017 2018 2019 2020 2021
2.43 2.46 2.40
2.0 2.18
2.01 2.01 2.06 2.12 2.03 2.11
0.0
1.52
-2.0 1.32 1.21 1.09 1.10
-4.0 0.87 0.87
0.70 0.70 0.70
-6.0
-8.0 -6.4
-10.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Malaysia Similarly rated peers, median Malaysia Similarly rated peers, median
Public debt, % GDP Fiscal revenue, % GDP
70 40 36.5
64.0 35
60
50 30
42.8 25
40
20 15.5
30
15
20 10
10 5
0 0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Malaysia Similarly rated peers, median Malaysia Similarly rated peers, median
8 Sources: EIU, Bank Islam Similarly rated peers: Botswana, Latvia, Lithuania, Peru and Slovenia Strictly private and confidentialSection 2
Revitalise the labour market
9
Strictly private and confidentialWAGE GROWTH IS KEY TOWARDS ATTAINING THE
HIGH-INCOME NATION STATUS
Monthly Gross Income in RM, 1995-2020 Wage-to-GDP, % in 2015-2021
9,000 37.5
37.1
8,000 37.0
7,089
7,000
36.5
6,000
5,209
5,000 36.0
4,000 35.5
3,000 35.0
35.0 34.8
2,000
34.5
1,000
0 34.0
1995 1997 1999 2002 2004 2007 2009 2012 2014 2016 2019 2020
33.5
Mean Median 2015 2016 2017 2018 2019 2020e 2021p
Sources: DOSM, Bank Islam
• We welcome the government’s on-going Income, Expenditure and • The 12th Malaysia Plan aims to bring Malaysia’s wage-to-GDP ratio
Basic Facilities 2022 survey, which will be unveiled in 1Q2023. In to 40% by 2025. Regrettably, the target seems ambitious amid
line with the declining unemployment rate (Jan 2022: 4.2%, July prolonged lockdowns, bringing the ratio down from 37.1% in 2020 to
2022: 3.7%), we believe that household incomes will go up 34.8% in 2021.
eventually, albeit below the pre-pandemic levels. • Therefore, we expect the government to outline policies to repair the
• As such, we believe that the government will introduce new labour market through upskilling and reskilling programmes,
initiatives to improve the rakyat’s disposable income and enhance digitalisation and another revision of the minimum wage.
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the social protection programme. Strictly private and confidentialWAGE GROWTH IS KEY TOWARDS ATTAINING THE
HIGH-INCOME NATION STATUS
CPI vs. Food Inflation, y-o-y% Gini Coefficient Index
8.0% 7.2% 60.0
6.9%
7.0% 55.7
6.0% 55.0
5.0% 4.7%
50.0
4.0% 3.4%
3.0% 2.3%
45.0
2.0% 44.2
41.1
1.0% 39.9
40.0
0.0%
Aug-21 Dec-21 Apr-22 Aug-22
35.0
CPI Food CPI 1970 1980 1990 2000 2010 2020
Sources: DOSM, Bank Islam
• We believe that inflation will peak in 4Q2022. However, rising prices • Income and wealth inequalities worsened amid prolonged
will persist amid unfavourable USD/MYR exchange rates and lockdowns, leaving the vulnerable groups more exposed to rising
supply-side constraints. As such, we take it that the government will inflation.
continue the current subsidies and price control mechanism on basic • One way to address this is by bridging the development gap
goods and services. between states and regions. We believe that the government will
• Should the Automatic Pricing Mechanism (APM) system be outline a more comprehensive account of digitalisation via 5G,
reintroduced, the government will rebalance this policy by enhancing infrastructure development and improvements to access to finance
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the existing income supplement system to cushion rising prices. and social welfare. Strictly private and confidentialDISCLAIMER
Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under
circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or
arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document.
This document is for information purposes only and has no regard to the specific investment objectives, financial situation or
particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy,
accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and
may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different
assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any
purpose without Bank Islam’s prior written permission.
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Strictly private and confidentialThank you.
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