OCBC TREASURY RESEARCH - Malaysia 22 October 2021 - OCBC Bank
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OCBC TREASURY RESEARCH
Malaysia
22 October 2021
Finding Funding
Wellian Wiranto Malaysia’s Budget 2022 to stay expansionary despite limited revenue uptick
+65 6530 6818 • Malaysia’s government will be tabling its Budget 2022 on Oct 29th – the first
WellianWiranto@ocbc.com under PM Ismail Sabri. Coming on the back of a grand 5-year spending plan
under the 12MP, the new budget is likely to stay expansionary, in part due
to the political considerations ahead of a potential general election next year.
• We see deficit coming in at 5.0-5.5% of GDP. This should allow for a
narrative of fiscal consolidation from what is likely to be a shortfall of 7.0%
of GDP this year. If recent years are any guide, it will also allow room for
some stimulus should the economy face unforeseen headwinds once again.
• When the budget is announced, there will inevitably be much fanfare about
how much is to be spent where. To us, however, it is a lot more important to
focus on how it will all be funded. With GST re-introduction being too ‘hot’
to carry out in the near term, the government has few alternative avenues
for revenue. This would make leaning on Petronas – a tried-and-tested way
before – rather tempting, especially given the recent oil price uptick.
The Easy Part
Before we delve into the tough part of how the Malaysian government could
try to raise its revenue, let’s first zoom in on the relatively easier part about
where it would focus its expenditure on.
To that end, the 12MP five-year plan that it announced in late September
should provide a fairly comprehensive roadmap that guides the broad strokes
of expenditure focus in Budget 2022.
From that document, we garnered a heavy uptick in development spending,
especially. Over the period of 2021-25, the 12MP envisages a hefty 53.8%
increase in development expenditure compared to the 11MP of half a decade
before, to as much as MYR400bn.
To decipher how much development expenditure will be budgeted for 2022, it
helps to know that 2021 figure was slated to be MYR68.2bn, leaving an
average of MYR83bn worth of annual spending for 2022-25. Hence, if the
government is keen to showcase its seriousness about hewing close to the
12MP’s visions, it would likely ramp up to the tune of MYR80bn, if not more –
at least initially.
Recall, for instance, that when it was first budgeted in late 2020, the
development expenditure for 2021 was supposed to be MYR69bn, but it had
to be revised down due to the reality of fiscal stringency imposed by the
Covid-19 pandemic resurgence. Historically speaking, there is a broad
tendency for actual spending to fall short of the plan, as well.
Treasury Research & Strategy 1OCBC TREASURY RESEARCH
Malaysia
22 October 2021
Source: OCBC, CEIC.
Still, we expect a significant focus on development expenditure to help
growth, especially for big-ticket projects such as the East Coast Rail Link to
connect the less developed eastern coast area of the Peninsular Malaysia to
the economic epicentre of Klang Valley, for instance.
Indeed, the geographic aspect of the budget allocation is a perennial feature
in Malaysia, with areas that are less developed receiving more attention. It
does not hurt that states such as Kelantan, Terengganu, Sabah, and Sarawak
are crucial election battlegrounds.
The harder part
When it comes to how to fund all these worthwhile projects, however, there
has been relatively less clarity. At the broad level, the 12MP envisions a
considerable decline in fiscal deficit to 3.0-3.5% of GDP by 2025 – effectively
halving the shortfall from what is likely to be close to 7.0% of GDP this year. As
clearly as it shows the market where the end-destination will be, the plan is a
lot less explicit about the path it has in mind to get there, however.
As we detailed in our Sep 28th report, the path towards such a steep cut in
deficit may be even more arduous given the large increase in development
expenditure – and entail a similarly big uptick in incoming revenues.
Source: OCBC, Bloomberg.
Treasury Research & Strategy 2OCBC TREASURY RESEARCH
Malaysia
22 October 2021
To some extent, the pre-budget statement that the MOF laid out on Aug 31st
did mention a few means of increasing expenditure, such as the introduction
of Special Voluntary Disclosure Program for those who have failed to pay
indirect taxes such as customs duties, and the requirement for furnishing Tax
Compliance Certificate for firms that want to participate in government
tenders. However, even though they are helpful, they are unlikely to move the
needle in a major and sustainable way in raising revenues.
Hence, the potential lingering revenue gap would remain a considerable one,
leaving us to assume a baseline of fiscal deficit of 5.0-5.5% of GDP, in line with
the 5.4% deficit that the Budget 2021 laid out at the first instance of its
introduction in late 2020, before subsequently climbing up to the official 6.5-
7.0% ratio after various episodes of fiscal stimulus packages this year.
While there is an off-chance that the deficit might well be wider than that, we
believe that the government will be keen to leave itself some wiggle room
should there be a need to come up with stimulus packages again.
Even as the Covid-19 pandemic bout has come under control and the
economic reopening is happening in earnest – with talks of border reopening
in November, for instance – the situation will remain an unpredictable one for
a while.
Hence, even as the recent increase in debt ceiling from 60% to 65% of GDP
would technically allow for deficit to be at a higher level in 2022, we are of the
view that the government will act with some restraint.
For one, potential action by ratings agencies continues to form a natural
constraint, with S&P retaining a negative outlook on Malaysia’s sovereign
rating, for instance. The recent uptick in MGS yields – while occurring at a
time of some upward shift in global yields – may also be indicative of bond
supply concerns by market players.
Source: OCBC, Bloomberg.
Treasury Research & Strategy 3OCBC TREASURY RESEARCH
Malaysia
22 October 2021
In the long run
Looking beyond Budget 2022, for Malaysia’s fiscal consolidation path to
materialize more concretely, resolving the issue of revenue shortfall is
inevitable. To that end, purely from the economics angle, the re-introduction
of GST remains the most viable option.
Indirect Taxes, % of Total Revenue
25
GST (Goods & Services Tax)
20
SST (Sales & Services Tax)
15
10
5
0
-5
Jun15 Jun16 Jun17 Jun18 Jun19 Jun20 Jun21
Source: OCBC, CEIC. Note: Negative GST receipts denote periods when the government had to
pay out a backlog of GST refunds.
First introduced in 2015 by the Najib administration, GST came to contribute
as much as 22.4% of total revenue by 2017. When it was discontinued in 2018
by the Pakatan Harapan government, it was supposed to be replaced by a
return of Sales and Services Tax. However, the replacement tax regime has
not contributed as much to the government coffers since.
The issue of GST reintroduction remains a politically loaded one, given that its
widespread unpopularity. The fact that the GST refunds were not properly
implemented the first-time round, resulting in a backlog of MYR19.4bn
refunds that the PH government had to clear, has also left a bad taste.
Moreover, to bring it back at a time when the economy is still bearing deep
battle scars of the fight against the pandemic impact would be akin to adding
salt to the wound, as well.
However, despite such constraints, the government has not dismissed such an
idea altogether. As recently as Aug 12th, the Economy Minister Datuk Seri
Mustapa Mohamed said that the authorities should consider the suggestion
by OECD’s recommendation to bring back GST as part of Malaysia’s medium-
term fiscal strategy, for instance.
To us, it remains a matter of when, rather than if, that the GST would make a
comeback. It has to await the end of election cycle and also a firmer footing of
economic recovery, nonetheless, which means that it is unlikely to take place
before mid-2023 at the earliest.
Treasury Research & Strategy 4OCBC TREASURY RESEARCH
Malaysia
22 October 2021
Oil Price vs. Revenue
120 40
90 30
% of total revenue
USD per barrel 60 20
30 10
0 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Petroleum revenue Tapis Crude - LHS
Source: OCBC, CEIC, MOF. Note: 2021 Tapis crude price is the average year-to-date.
In the meantime, to plug the revenue shortfall, the government might have to
resort to the familiar strategy of leaning in on the state-owned oil and gas
company, Petronas, for special dividends. In August, Petronas declared an
additional MYR7bn worth of dividends to the government, on top of the
MYR18bn that it had previously committed. Last year, it added MYR10bn to
the MYR24bn that was initially flagged. In 2019, it extended a record high
MYR54bn, including a special dividend of MYR30bn to help cover the GST
refunds backlog at that time.
Hence, it might not be too surprising to see the history of calling in the cavalry
support of Petronas in crunch time to repeat itself soon. Indeed, if the recent
commodity price run continues, a special dividend from Petronas might well
form one of the key planks of the government’s revenue strategy next year.
To peg Malaysia’s revenue trajectory that closely to oil price once again is by
no means a sustainable solution, considering how volatile oil price has been
over the last few years – and not to mention the global structural shift away
from fossil fuel over the medium term to fight climate change.
However, between choosing the immediate-period unpalatability of
reintroducing GST and the medium-term concern of fiscal dependence on the
fickle oil, the government might not have the luxury of choice at this point.
Treasury Research & Strategy 5OCBC TREASURY RESEARCH Malaysia 22 October 2021 Treasury Research & Strategy Macro Research Selena Ling Tommy Xie Dongming Wellian Wiranto Howie Lee Head of Research & Strategy Head of Greater China Research Malaysia & Indonesia Thailand & Commodities LingSSSelena@ocbc.com XieD@ocbc.com WellianWiranto@ocbc.com HowieLee@ocbc.com Herbert Wong Hong Kong & Macau herberthtwong@ocbcwh.com FX/Rates Strategy Frances Cheung Terence Wu Rates Strategist FX Strategist FrancesCheung@ocbc.com TerenceWu@ocbc.com Credit Research Andrew Wong Ezien Hoo Wong Hong Wei Seow Zhi Qi Credit Research Analyst Credit Research Analyst Credit Research Analyst Credit Research Analyst WongVKAM@ocbc.com EzienHoo@ocbc.com WongHongWei@ocbc.com ZhiQiSeow@ocbc.com This publication is solely for information purposes only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our prior written consent. This publication should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities/instruments mentioned herein. Any forecast on the economy, stock market, bond market and economic trends of the markets provided is not necessarily indicative of the future or likely performance of the securities/instruments. Whilst the information contained herein has been compiled from sources believed to be reliable and we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee and we make no representation as to its accuracy or completeness, and you should not act on it without first independently verifying its contents. The securities/instruments mentioned in this publication may not be suitable for investment by all investors. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. This publication may cover a wide range of topics and is not intended to be a comprehensive study or to provide any recommendation or advice on personal investing or financial planning. Accordingly, they should not be relied on or treated as a substitute for specific advice concerning individual situations. Please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. OCBC Bank, its related companies, their respective directors and/or employees (collectively “Related Persons”) may or might have in the future interests in the investment products or the issuers mentioned herein. Such interests include effecting transactions in such investment products, and providing broking, investment banking and other financial services to such issuers. OCBC Bank and its Related Persons may also be related to, and receive fees from, providers of such investment products. This report is intended for your sole use and information. By accepting this report, you agree that you shall not share, communicate, distribute, deliver a copy of or otherwise disclose in any way all or any part of this report or any information contained herein (such report, part thereof and information, “Relevant Materials”) to any person or entity (including, without limitation, any overseas office, affiliate, parent entity, subsidiary entity or related entity) (any such person or entity, a “Relevant Entity”) in breach of any law, rule, regulation, guidance or similar. In particular, you agree not to share, communicate, distribute, deliver or otherwise disclose any Relevant Materials to any Relevant Entity that is subject to the Markets in Financial Instruments Directive (2014/65/EU) (“MiFID”) and the EU’s Markets in Financial Instruments Regulation (600/2014) (“MiFIR”) (together referred to as “MiFID II”), or any part thereof, as implemented in any jurisdiction. No member of the OCBC Group shall be liable or responsible for the compliance by you or any Relevant Entity with any law, rule, regulation, guidance or similar (including, without limitation, MiFID II, as implemented in any jurisdiction). Co.Reg.no.:193200032W Treasury Research & Strategy 6
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