This article first appeared in The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

FOR almost two years now, Malaysia has been suffering from the Covid-19 pandemic, which saw the economy ravaged as people and industries were put on lockdown for an extended period, and set back the local economy for a few years.

According to the World Bank, Malaysia’s gross national income (GNI) per capita, based on the current US dollar rates, stood at US$10,580 in 2020, which was lower than the US$10,650 in 2018. The country’s highest GNI per capita was US$11,230 in 2019.

As the country emerges from the pandemic and the economy gradually reopens, Budget 2022 will focus on three major themes — recovery, resilience and reform. It will be the foundation for rebuilding Malaysia’s economy after almost two years of economic and health crises.

Budget 2022, which will be tabled by Finance Minister Tengku Datuk Seri Zafrul Aziz in parliament on Oct 29, is expected to include slightly larger allocations for development expenditure, as well as more direct assistance for the people and industries to spur economic recovery.

“The economic reopening is expected to continue next year as Budget 2022 is based on the expectation that the economy is recovering from the adverse effects of the global health crisis and unprecedented containment measures. However, we expect there will be incentives provided to industries and businesses that have been struggling to recover after being hit by the pandemic and seen a sharp decline in demand,” Imran Yusof, head of MIDF Research, tells The Edge in an email.

Industries such as tourism, hotel and accommodation, and aviation, for example, have been impacted by the border closures and reduced demand for travel and tours. Budget 2022 is expected to provide support and promote more domestic tourism activities.

According to Imran, similar to Budget 2021, MIDF Research foresees allocations such as grants and financial assistance to support micro, small and medium enterprises (MSMEs) in revitalising their business activities.

Budget 2022 is expected to be mildly expansionary as the government will have to balance the need for spurring economic recovery with fiscal discipline. In July, Tengku Zafrul said Malaysia’ fiscal deficit would increase to as high as 7% of gross domestic product this year. This will be higher than the 6% estimated in Budget 2021, as the government had to increase spending on Covid-19 containment and management measures this year. The government wants to increase funds allocated to the response to Covid-19 from RM65 billion to RM110 billion.

To do this, Malaysia will have to increase its statutory debt limit to 65% of GDP from the 60% that was passed by parliament in 2020. The bill to increase the debt limit passed the second reading in the Dewan Rakyat on Oct 11.

Meanwhile, the government’s debt levels have been increasing steadily. According to Bank Negara Malaysia’s data, the government’s total liabilities stood at RM958.4 billion as at the second quarter of this year, with RM34 billion being short-term debt.

Since the second quarter of 2020, the government’s short-term debt has increased rapidly from RM6 billion in the first quarter of 2020. Its short-term debt has increased almost 500% between 1Q2020 and 2Q2021.

Meanwhile, medium- and long-term debt increased by a quantum of 13% during this period, from RM823.8 billion in 1Q2020 to RM958.4 billion in 2Q2021. This shows that the government relied more on short-term facilities to fund its various programmes and responsibilities during this period.

While the need to spend more to revive the economy and assist the people and businesses is apparent, the government has committed to reducing its fiscal deficit to between 3% and 3.5% by 2025, as outlined in the 12th Malaysia Plan (12MP). That could mean the government would have to raise more revenue to offset the increased spending in the form of new taxes or increase the rate of existing tax regimes. This, however, is expected to be undertaken gradually, considering the hardships faced by the people and businesses.

On the back of these issues, analysts and economists do not expect the government to introduce major changes to tax rates, but will focus more on other measures to raise revenue such as optimising the tax incentives in investments, apart from reducing leakages.

“Any plans to reintroduce the GST (Goods and Services Tax), for example, will only be appropriate when Malaysia’s economic growth is more stable and sustainable,” says MIDF Research’s Imran.

At the same time, the government will introduce the Fiscal Responsibility Act as part of the continuous effort to relook and revamp overall fiscal management. This includes strengthening its fiscal revenue generation, minimising leakages and low-impact fiscal spending, and being more prudent in government debt management.

For Budget 2022, the government is expected to allocate a total of RM348.3 billion, which is 10.6% higher than the revised RM314.8 billion in 2021, says Kaladher Govindan, head of research of TA Securities, in an Oct 13 note. This increase is underpinned by an expected RM83 billion for development expenditure, which is much higher than the RM68.2 billion in 2021, to drive socioeconomic recovery activities and the nation’s development agenda, he adds.

“Our forecast revenue of RM246 billion in 2022 is 11.8% higher than the RM220 billion in 2021, supported by higher tax contributions from corporations and individuals, as the economic recovery gains momentum in the second half of 2022, and better dividend contributions from government-linked companies, especially Petroliam Nasional Bhd (Petronas),” says Kaladher.

“With a strong recovery in crude oil and gas prices in 2021 and a promising outlook in 2022, on the backdrop of recovering demand and Opec+’s tight grip on supply, anticipate dividend payment from Petronas to rise to at least RM35 billion in 2022, from RM25 billion in 2021 and RM34 billion in 2020.”

1. Construction

The 12MP report outlines a development expenditure of RM400 billion, the largest in history, over the next five years. However, the plan also emphasises basic infrastructure, such as roads, water and electricity, as well as internet connection, especially in rural areas.

At the same time, the construction industry is still in a rut due to the stop-start measures of the Movement Control Order (MCO), as well as the slow property sector and the scrapping or postponement of some major infrastructure projects since 2018.

The construction sector has been waiting for more big-ticket items from the government, such as the Mass Rapid Transit Line 3 (MRT3) project and possibly a high-speed rail (HSR) project. The status of these projects is still unclear.

RHB Research analysts Lester Siew and Eddy Do Wey Qing noted in an Oct 21 report that the headline development expenditure allocation could come in flat to slightly higher in Budget 2022, although with a direct allocation to the transport sector possibly contracting year on year off a high base in 2021.

The bank-backed research house says next year’s infrastructure expenditure is likely to revolve around the implementation of existing projects such as the East Coast Rail Link (ECRL) and Pan Borneo Highway in Sabah and Sarawak.

“Given that the debt-to-GDP ratio has not consolidated as quickly as previously forecast, as well as the lower-than-expected government revenue collection brought about by the global economic slowdown, we believe the fiscal headroom for pump-priming activities may be restricted to a certain extent. As such, new projects in the year ahead, in our view, could largely be tied to basic infrastructure like roads and bridges, as well as water services infrastructure such as dams, off-river storage, and water treatment and sewage treatment plants,” it adds.

Higher development expenditure allocations to Sabah and Sarawak, as outlined under 12MP, are expected. Continued funding for the Pan Borneo Highway, Sarawak Water Grid Programme and Sabah Seafront projects can be expected, say the RHB Research analysts in the report.

Despite the fiscal challenges, the analysts believe there are still positives to watch out for at the upcoming tabling of Budget 2022, namely the status of mega projects such as the MRT3 and domestic HSR.

Nevertheless, the Public Private Partnership 3.0 (PPP3.0) initiative must be announced first for these projects to be rolled out. The government has said it is looking to revamp the PPP model, which will then be used to fund big-ticket items such as the MRT3.

“With the debt-to-GDP ceiling set to be raised to 65%, this could provide the government increased flexibility in accelerating the implementation of large-scale projects once the domestic economy inflects. Our ‘overweight’ call is maintained at this juncture, pending more clues from the Budget 2022 announcement for fresh sector catalysts. We hope that the upcoming budget provides better colour on the pacing and magnitude of public project implementation,” says the RHB Research report.

2. Telecommunications

Bank Islam Malaysia Bhd’s chief economist Dr Afzanizam Abdul Rashid opines that the government needs to be mindful of big-ticket items, especially when working remotely becomes more popular among employers.

“This would result in the need to realign or reprioritise the rollout of physical infrastructure projects. Perhaps, the demand for public transport may not be as high as it used to be as more employees are more comfortable practising flexible working arrangements,” he tells The Edge.

“What is urgently needed is better internet coverage, data speed and bandwidth, ownership of smart devices as well as telco subscription rates whereby affordability can still be an issue. In this respect, more resources should be diverted towards improving the ICT-related infrastructure.”

3. Property development

Meanwhile, the government is being urged to extend the Home Ownership Campaign (HOC), considering the still-weak demand for property.

According to the Property Industry Survey 1H2021 and Market Outlook 2H2021 conducted by the Real Estate and Housing Developers’ Association Malaysia (Rehda), 82% of respondents reported having less than 30% unsold residential units in 1H2021. About 43% of those unsold units are priced between RM250,001 and RM700,000, compared with 51% in the second half of 2020, as reported by Rehda.

Meanwhile, 58% of the respondents reported that they had unsold completed residential units over the last one to three years.

The key challenges to selling the units are end-financing loan rejection, unreleased bumiputera units and mismatched pricing, according to Rehda. About 88% of respondents experienced end-financing issues mainly because of ineligibility, owing to insufficient income.

According to Rehda, it has made several proposals to the government that should help the property market recover. These include a Home Ownership Assistance Programme, similar to the previous developer interest bearing scheme, but only for properties priced below RM500,000.

The association also proposed an extension of the current waiver on Real Property Gains Tax (RPGT), the removal of the cap on the loan-to-value (LTV) ratio on the purchase of the third property onwards and a review of the threshold for foreigners purchasing real estate.

Bank Islam’s Afzanizam opines that due to the tight budget that the government is experiencing, extending exemptions could affect its efforts to rein in the fiscal deficit.

In the pre-budget 2022 statement released by the Ministry of Finance (MoF), Tengku Zafrul said revenue collection in the first half of 2021 was up by 4.6% compared with the same period in 2020, which was slower than the estimates in Budget 2021.

The government estimated tax revenue collection at RM162.1 billion in 2021, which is 10.3% of GDP. This includes the collection of direct taxes of RM120 billion and indirect taxes of RM42.1 billion.

However, as at July 2021, direct tax collection stood at RM67.4 billion, or 56.2% of the target, while indirect tax collection came in at RM24.8 billion or 59% of the target, according to Tengku Zafrul.

“Revenue collection for the first half of 2021 was lower than expected and subsequent collection is expected to decline due to the Covid-19 pandemic and implementation of the Movement Control Order, which has affected business activities and income of traders, leading to an increase in the number of those who have lost their income,” he said in the statement.

This year, the government has launched and implemented RM3 billion worth of tax initiatives through Budget 2021 and various economic stimulus packages. These tax initiatives are expected to continue to spur the economy next year.

Through Budget 2021, the government introduced measures to broaden the tax base to increase revenue collection. This included the imposition of excise duty on all types of electronic and non-electronic cigarette devices, including vape, as well as nicotine-free liquid and gel.

The government also expanded the scope of the tourism tax levy to cover accommodation premises booked through online platform providers.

4. Tobacco products

To reduce revenue leakages, the government has set up a Multi-Agency Working Group, chaired by the MoF, to formulate strategies to curb smuggling activities. It has also implemented measures to tighten controls on the licensing and import of cigarettes and tobacco products by freezing the issuance of new cigarette import licences, as well as imposing import quotas on cigarettes.

Transhipment of cigarettes is restricted at selected ports while cigarettes and tobacco products are dutiable at all duty-free islands. All these measures are imposed to curb the illicit trade of cigarettes and tobacco products, which is valued at an estimated RM5 billion a year.

The government has also streamlined the definition of related companies for the purpose of group relief claims, imposed penalties for failure to provide transfer pricing documents and stipulated the requirement for taxpayers to settle taxes before commencing any proceedings against the government or director-general of the Inland Revenue Board.

Nevertheless, UOB KayHian Malaysia head of research Vincent Khoo opines in an Oct 15 report that there will not be new detrimental taxes or raised rates announced in the budget, such as capital gains or new windfall taxes. “We take the view that Malaysia cannot afford to expose its relatively frail equity market to capital flight by introducing a capital gains tax. Meanwhile, there is only a modest pragmatic benefit of extending the current windfall tax structure on beneficiaries of the Covid-19 pandemic,” he adds.

5. Automotive

For the automotive sector, industry players are still awaiting a comprehensive policy on electric vehicles and other forms of green mobility. While the budget is not the place for the government to present its industrial policy, it can propose incentives to spur uptake and investments in the sector.

“It is quite possible for the government to do that [propose incentives] considering the escalating awareness of environmental issues with many companies and governments globally committing to net zero carbon in the future and cheaper green mobility options for these days compared with a few years ago,” says Syhiful Zamri Abdul Azid, chief investment officer at Maybank Asset Management Sdn Bhd.

The sector is also expecting existing sales tax exemptions for cars to be extended until 2022, considering the weak sales numbers.

Due to the strict MCO implemented from March 18, 2020, until the gradual relaxation of measures in September and October this year, passenger vehicle sales dropped to 282,992 units as at end-September, compared with 312,427 during the same period last year.

6. Consumer goods, utilities and MSMEs

All in all, the federal budget is expected to be another populist budget with possibly more handouts for the people and for industries that have been adversely affected by the Covid-19 pandemic. With the 15th general election just around the corner, the government may increase cash assistance to lower-income groups, which could help boost consumption.

“Budget 2022 is of significant importance as we emerge from the pandemic, as the government has to spend to boost private consumption and investment. Measures to boost consumption and alleviate the high cost of living are a no-brainer at a time when the nation is staring at a general election between July 2022 and July 2023. Considering the highly fragmented nature of Malaysian politics, there is a high probability for it to be a populist budget to garner broader support of the public,” says TA Securities’ Kaladher in an Oct 13 report.

Apart from cash handouts, the government could also boost allocations for affordable housing, schooling allowances and rebates for internet and utility bills to assist the people in making ends meet, as well as to boost consumption to revive the economy.

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