KUALA LUMPUR (Sept 30): UOB Global Economics and Markets Research has projected a narrower fiscal deficit of 6.5% of gross domestic product (GDP) for 2022 (2021F: -7.0%), as Malaysia would have moved from the pandemic into an endemic phase and the domestic economy recovers to reach 5.5% growth next year.
The government is expected to target GDP growth of between 5% and 6% for 2022 (2021F: 3%-4% versus UOB’s 4%), the research outfit said in its Budget 2022 preview.
“Pending the passage of a higher debt ceiling at 65% to fund an additional RM45 billion Covid-19 expenditure, the debt-to-GDP ratio is expected to remain below the new threshold at ~63% in 2022,” it said.
UOB senior economist Julia Goh and economist Loke Siew Ting said they expect the government to announce an expansionary budget on Oct 29, with policies to enable a stronger and sustainable recovery.
“We expect expansionary policies which include RM32.5 billion for the Covid-19 Fund, development expenditure of RM76.1 billion (including rehabilitation plan), continued targeted cash handouts and financial aid particularly for micro, small and medium enterprises (MSMEs).
“These initiatives will be aligned with the 12th Malaysia Plan (12MP, 2021-2025) and Sustainable Development Goals (SDG) that sets the medium-to-long term path for the country,” they said.
Goh and Loke also listed out some other goodies that can be expected from Budget 2022. They are:
- Tax incentives to promote electric vehicles, revive domestic tourism sector, and boost private investments in high value added industries particularly E&E, aerospace, global services, halal industry, creative, tourism, biomass, and smart farming;
- Continued subsidies for domestic fuels, cooking oil, LPG, wages, and electricity bills;
- Basic necessities assistance such as free data plan and food basket/voucher for B40 group;
- Improvement in compensation such as higher SOCSO contribution or insurance coverage by government for employees in the gig economy;
- Reinstatement of initiatives to raise home ownership for B40 and M40 income earners, including an extension of Home Ownership Campaign until end-2022.
Govt expenditure projected to rise 2.9%
The UOB economists said total government expenditure is projected to rise 2.9% to RM338.1 billion in 2022 (2021 forecast: +4.6% to RM328.4 billion).
This, they said, will be partly cushioned by an estimated revenue collection of RM230 billion (2021F: RM221.3 billion), leaving a fiscal shortfall of RM107.3 billion for 2022 (2021F: RM106.2 billion). The budget gap is equivalent to 6.5% of GDP next year, smaller than an estimated 7% of GDP for this year.
Goh and Loke expect Petroliam Nasional Bhd to pay the government a dividend of RM26 billion in 2022, slightly higher than a forecast of RM25 billion in 2021.
An expected economic expansion also implies higher income tax collection from individuals and corporations, they added.
According to them, operating expenditure is predicted to jump to RM229.5 billion from an estimated RM220.8 billion in 2021, primarily driven by elevated fixed expenses, namely emoluments, pension and gratuities, as well as debt service charges that make up a combined share of 65%.
They expect fuel subsidies to persist with an average Brent crude oil price assumption of US$80 per barrel next year, compared to an estimated oil price of 73 per barrel in 2021.
“Supply and services expenses may rise gradually, in tandem with domestic economic growth and further resumption in government procurements,” they added.
On financing, the UOB economists expect the government to issue new sovereign bonds, as well as utilitise other reserves to fund its expansionary budget next year.
“This is in view of higher global interest rates and anticipated monetary policy normalisation in major economies, amid caution on bond supply pressures,” they said.
They added that total gross Malaysian Government Securities and Government Investment Issues issuance is estimated to maintain at 2021’s level at RM160 billion to 165 billion, going by UOB's 6.5% budget deficit-to-GDP ratio target.
GDP seen improving from 4Q21 onwards
On economic prospects in 2022, Goh and Loke expect supportive global demand, Malaysia’s transition to an endemic phase, resumption of infrastructure spending, and continued fiscal support to drive GDP growth of 5.5%, which they deemed to be in line with the government’s estimated growth of between 5% and 6% for 2022.
UOB has forecast the country’s GDP to grow 4% in 2021 after rebounding to a 5.8% growth in the fourth quarter this year, following an estimated 3.5% contraction in the third quarter.
Interest rate seen rising 25bps in 2H22
With fiscal policy gearing up for a stronger lift next year, UOB expects Bank Negara Malaysia to maintain its current accommodative monetary policy stance until mid-2022.
Headline inflation is expected to remain subdued, averaging 2.5% in 2021 and 2022. This is premised on the government extending its relief measures, particularly electricity bill discounts and domestic fuel subsidies into next year.
Goh and Loke said muted property prices, slower outstanding loan growth since October 2020, and stable household debt growth suggest lesser financial imbalance risks compared to 2011 till 2013.
“This infers no urgency to raise domestic interest rates anytime soon, despite anticipated monetary policy normalisation in major economies," they added.
Against this backdrop, they projected the overnight policy rate at 1.75% until mid-2022, and one 25 basis points (bps) hike to 2% in the second half of 2022.