Malaysia Budget Lifts Development Spending to Revive Economy

Malaysia on Friday unveiled the largest budget in its history for 2021, boosting spending on social sectors and infrastructure to soften the blow from the coronavirus pandemic and get the $365 billion economy back on track for rapid growth.

The 322.54 billion ringgit ($78 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, down from 6% expected this year, the finance ministry said in a report released alongside the budget.

“This is very much a Covid budget, where obviously the government is spending big in order to restart the economy,” said James Chin, a Malaysian academic and political analyst 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 $73 billion of stimulus 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 Thursday’s 2.5% spurt, which was the biggest gain since March. The ringgit ended Friday’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.

Malaysia Budget Lifts Development Spending to Revive Economy

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 69 billion ringgit for development spending -- up 38% from 2020 -- with 15 billion ringgit to be spent on transport. Another 17 billion ringgit will be channeled to a Covid-19 Fund set up earlier this year, while spending on healthcare is being bumped up 64% to 4.7 billion ringgit.

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%.

Malaysian Glove Makers to Pay $97 Million To Fight Pandemic

Among the budget’s key proposals:

  • One-time aid worth 6.5 billion ringgit for 8.1 million eligible people
  • A one-percentage point cut in income tax, and a tax reduction for those earning between 50,001 to 70,000 ringgit annually
  • 1.5 billion ringgit in wage subsidies and 2 billion ringgit to boost hiring incentives
  • Stamp-duty exemption for first home purchase, and 1.2 billion ringgit for public housing projects
  • 11.1 billion ringgit for development among the country’s indigenous ethnic groups
  • 2.7 billion ringgit for rural infrastructure development
  • Malaysia’s giant glove companies -- Top Glove Corp., Hartalega Holdings Bhd., Supermax Corp. and Kossan Rubber Industries Bhd. -- will donate 400 million ringgit to bear some of the cost of a coronavirus vaccine

Government revenue is expected to rise 4.2% next year to 236.9 billion ringgit. 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 18 billion ringgit.

©2020 Bloomberg L.P.

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