Press statement – 22 October 2015, George Town, Penang
Dr Lim Kim-Hwa, Chief Executive Officer and Head of Economics
Tim Niklas Schoepp, Senior Executive Officer
Dr Lim Chee Han, Senior Analyst
Ong Wooi Leng, Senior Analyst
Since the Budget 2015 was tabled last October, external and internal events have affected Malaysia’s economy.
Background: Falling prices of the major commodities has reduced Malaysia’s export earnings and Ringgit
The fall of crude oil, palm oil, rubber and other commodities has affected Malaysia’s economy more than other countries in Asia. Constituting about 29.1% of total export value in August 2014, these commodities (LNG, crude petroleum, petroleum products, palm oil, and rubber products) are Malaysia’s major export goods. However, the percentage share of export value of these commodities has declined to 22.7% by August 2015. This translates to RM3.45 billion lower revenue from these commodities in the first eight months in 2015. The Ringgit has also depreciated against major currencies.
Background: High government debt and depleted central bank reserves are factors of concern
The total federal government debt and the federal government-guaranteed debt have increased to RM627.5 billion and RM175.8 billion respectively, equivalent to 68.2% of the GDP in 2014. Meanwhile, central bank reserves fell by 19.6% or US$22.7 billion in the first 8 months of 2015.
Under these circumstances, we expect the Budget 2016 to be:
Expectation 1: Non-expansive Budget with limited fiscal stimulus
The Prime Minister and Finance Minister has pledged to reduce the budget deficit. As such, the Budget 2016 is unlikely to be an expansive budget. There is limited room for fiscal stimulus to the economy.
The budget is expected increase to about RM290 billion, based on a compound annual growth rate (CAGR) of 7% by the Ernst and Young in 2014. Nevertheless, as government revenue and economic growth in 2016 is likely to be lower, the total budget might be lower than this.
In the Budget 2015, operation expenditure was 81.6% of the total budget, with 18.4% being development expenditure. Over the past 6 years, operation expenditure has been increasing at a CAGR of 8% – faster than GDP growth. With limited room to maneuver, the development expenditure in this year’s budget is likely to be less than 18%.
Expectation 2: BR1M is likely to be increased further
With the reduction in subsidies and full implementation of GST, Bantuan Rakyat 1 Malaysia (BR1M) is expected to be increased. Whilst BR1M will reduce the impact of subsidy reduction and GST implementation on the lower income households, the households who do not receive BR1M will find their standard of living be squeezed further.
Expectation 3: List of GST zero rated and tax exempt goods to be expanded
This list (currently a total of 900 basic items and 2900 medicine items) is likely to be expanded. Whilst the intention is to alleviate the compression in standard of living, such a move is likely to complicate the GST administration procedure, thus increasing the cost of doing business.
Expectation 4: GST rate will stay at 6%
GST revenue is needed to fund programmes such as BR1M, hence GST implementation will not be reversed or suspended. GST will remain at 6% as any increase at this stage is likely to be met with electorate resistance.
Expectation 5: More subsidy cuts, but no further individual income tax cut
The Budget is expected to continue with the subsidy reform/rationalisation policy. This is needed to convince international credit rating agencies that Malaysia is capable at controlling its fiscal deficit. Maintaining Malaysia’s sovereign credit rating is important for the government and companies to meet their financing requirements at reasonable cost.
No further individual income tax cut is expected, as this was already announced in the previous budget. However, corporate tax rate for small and medium-sized enterprises might be lowered to help them withstand the economic slowdown.
Expectation 6: Some policy to boost confidence for the financial market
The budget would probably announce several policies that is not too dissimilar to the pre-budget initiatives in September that is meant to boost confidence in the financial market. In particular, companies might be incentivized to repatriate foreign income. Nevertheless, it is unlikely that more funds will be injected to ValueCap.
In conclusion, the Budget 2016 will not be a feel-good budget for all households. The budget would incline towards restoring investors’ and credit rating agencies’ confidence, encourage businesses and trades, and alleviating the plight of lower income households.