Big spending budget expected to drive 6.5% growth

KUALA LUMPUR: Malaysia unveiled the largest budget in its history for 2021, boosting spending on social sectors and infrastructure to soften the blow from the Covid-19 pandemic and get the economy back on track for rapid growth.

The RM322.54 billion spending plan is 8.5% larger than the one passed a year ago, though additional stimulus since then has narrowed the difference.

Next year’s fiscal deficit is projected at 5.4% of gross domestic product (GDP), down from 6% expected this year, the finance ministry said in a report released alongside the budget.

“This is very much a Covid-19 budget, where obviously the government is spending big in order to restart the economy,” said political scientist James Chin, who heads the Asia Institute at the University of Tasmania. “This is consistent with all the other countries around the world, where governments are overspending to restart the economy.”

The government estimates the new budget, combined with stimulus packages announced earlier this year, will drive the economy – currently mired in recession – to 6.5%-7.5% growth next year. That outlook hinges on controlling the pandemic and on a sustained recovery in global demand.

The country’s key stock index closed up 1.2%, adding to yesterday’s 2.5% spurt, which was the biggest gain since March. The ringgit ended today’s trading session 0.4% higher at 4.1293 per dollar. Government bonds also rose, with yields falling two to four basis points across the curve.

Political test

The first national budget since the pandemic hit, the plan must be approved by month-end. It will put Prime Minister Muhyiddin Yassin’s razor-thin majority to the test amid discontent from the premier’s biggest ally and opposition parties.

“It’s a delicate balance between meeting the citizens’ demands and stimulating the economy,” said Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia Bhd. “Fighting against Covid-19 is the key focus and, at the same time, ensuring those who are affected by the pandemic will receive targeted assistance.”

Next year’s GDP forecast marks a sharp rebound from the 4.5% contraction the government expects this year, which would be Malaysia’s worst showing since 2006. The central bank earlier this week projected the economy would shrink 3.5% to 5.5% in 2020.

Next year’s growth forecast isn’t unachievable, but a lot hinges on how the global recovery goes, according to Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities Pte in Singapore.

“The growth target of 6.5%-7.5% next year doesn’t look stretched considering the low base effect after a contraction of 4.5% this year based on official forecasts,” Phoon said. “Obviously these forecasts need to rely on a quick global recovery from the pandemic, and it is not without downside risks depending on the evolving Covid-19 situation.”

Budget details

The government is earmarking RM69 billion for development spending, up 38% from 2020, with RM15 billion to be spent on transport. Another RM17 billion will be channelled to a Covid-19 Fund set up earlier this year, while spending on healthcare is being bumped up 64% to RM4.7 billion.

Spending on the social sector will increase by 40.7% and transport by 47.5%, while spending on trade and industry is set to rise by 28%.

Among the budget’s key proposals:

  • One-time aid worth RM6.5 billion ringgit for 8.1 million eligible people
  • A one-percentage point cut in income tax, and a tax reduction for those earning between RM50,001 to RM70,000 annually
  • RM1.5 billion in wage subsidies and RM2 billion to boost hiring incentives
  • Stamp-duty exemption for first home purchase, and RM1.2 billion for public housing projects
  • RM11.1 billion for development among the country’s indigenous ethnic groups
  • RM2.7 billion for rural infrastructure development
  • Malaysia’s giant glove companies – Top Glove Corp, Hartalega Holdings Bhd, Supermax Corp and Kossan Rubber Industries Bhd – will donate RM400 million to bear some of the cost of a Covid-19 vaccine

Government revenue is expected to rise 4.2% next year to RM236.9 billion. Tax collection is seen rebounding, although non-tax revenue is forecast to drop by 15.5% next year, mainly due to lower investment income.

Dividends from Petronas, the national oil company, are expected to shrink by almost half in 2021, to RM18 billion.

Expert Cited

Related JCI Publications