BY LEE HENG GUIE, head of economic research, CIMB
Higher oil revenue will give the government the fiscal flexibility to be more expansionary. The government is expected to receive bumper oil revenues on the back of much higher crude oil prices than the 2006 Budget’s assumption of US$60 per barrel. It is estimated that every US$l/barrel increase in crude oil prices would raise Federal Government revenue by about RM500m over two years. Hence, based on the current average oil prices of US$70/barrel, the Federal revenue is estimated to be higher by RM1.5bil in 2006 and RM3bil to RM5bil in 2007. In fact, Petronas' dividend contribution to the Federal Government has ballooned from RM5.1bil in 2003 to RM11bil in 2005 and is estimated to hit RM16bil in 2006. Contributions by Petronas are sufficient to fully cover fuel subsidies.
The budget deficit has been retreating steadily from 5.7% of GDP in 2000 to 4.3% of GDP in 2004 and 3.8% of GDP in 2005. The 2007 budget deficit is expected to amount to 3.8% of GDP (3.5% of GDP in 2006), with total gross development expenditure amounting to RM40bil, an increase of 19.4% over estimated 2006’s RM33.5bil.
The public sector will provide the primary stimulus for domestic demand in 2007, cushioning the impact of the cooling US and China economies on exports. Monetary policy will remain accommodative in complementing the easing fiscal policy to sustain domestic spending and investment.
The government is expected to step up its development spending under the 9MP over the next two years. This (2006) is the first year of the 9MP, but given the transition period, the new spending programme will only start to kick in during 2007-08. This explains why the government has rolled out 880 projects worth RM15bil to be tendered out immediately and the phased announcement of larger infrastructure projects.
To ensure the smooth implementation of 9MP projects, the undertone of the 2007 Budget will provide strong assurance and a firm commitment to investors that the relevant ministries and agencies will be taken to task if they do not ensure the timely disbursement of funds and the successful implementation of value-for-money projects.
Funding of the budget is not a major issue given the ample domestic liquidity and comfortable government debt to GDP ratio of 41,8% as at end-March 2006 vs. an average of 42.7% during 1998-2005 and 61.1% during 1988-97. At 6.1% of total GDP, the Federal Government’s external debt is at a manageable level and is not a threat to the nation’s sovereignty.
Besides, foreign reserves have risen to US$79.1bil as at end-July, providing a strong buffer against any external shocks. More importantly, most of the larger infrastructure projects will be financed by the private sector via private finance initiatives (PFIs).
Based on our rough estimates, public investment is expected to contribute at least 1.5%-2.0% to real GDP growth in 2007. Private investment is expected to contribute 1.5%, thanks to the implementation of 9MP under PFIs and the continued inflows of FDI.
Despite slowing exports, we expect real GDP growth to be sustained at 5.6% in 2007 compared with an estimated 5.3% in 2006. This will be largely driven by the acceleration of public spending and healthy expansion of private sector expenditure.
At a time when consumer sentiment and spending are dampened by the negative transitory impact of higher energy prices and borrowing costs, the Government could introduce some “inter-temporal” measures to offset the higher living expenses. A few toll concessionaires are due for toll rate revisions in 2007. Also, the stubbornly high oil prices may compel another round of pump price hikes.
To provide some relief to households’ burden and leave more disposable income for spending, we expect the government to:
1. Reduce the employees’ contribution to the Employees Provident Fund (EPF) on a voluntary basis by 1-2 percentage points to 9%-10% of employees’ monthly wages. It is estimated that a one percentage point reduction in employees’ contribution to the EPF would release about RMlbil disposable income a year;
2. Provide higher tax rebates and raising the eligible taxable income bracket for this rebate;
3. Higher personal relief and child relief;
4. Raise the salary ceiling from RM 1,500 to RM2,000 for lower category workers, thus benefiting about 300,000 workers (under the proposed amendment to the Employment Act 1995); and
5. Fill up 30,000 government posts to help absorb unemployed graduates.
The reform of the EPF framework needs to strike a balance between old age protection and the need to keep employer costs to a minimum. Wages are a key component of business costs. To be sustainable over the long term, the EPF needs to keep the statutory burden on employers as light as possible, especially for high-income earners. This will contribute to labour market flexibility. We propose the following:
The government must make Malaysia a place where enterprising people want to live, work and enjoy, and also a place that global talent treat as their second home. While the government continues its role to reduce income disparity through employment restructuring, it should adopt a broader approach to allow greater flexibility and diversity in catering to specific industry demands. The government should undertake a thorough review of the employment of foreign talent in essential services, with a view of streamlining the procedures and guidelines of employing expatriates,
Malaysia needs to enhance its ease of doing business to strengthen its position as an investment destination.
Tracking past expenditure trends, we also observe an uneven disbursement of funds, with disbursements being unusually large towards the last quarter. This uneven pattern could disrupt the impact of fiscal spending on the domestic economy. Funds should not be dispensed at the year-end just to meet the budget’s target.
To develop the REIT market and make it more regionally competitive, we expect the Government to lower or scrap its 28% tax on property trusts which is imposed on investors based outside the country.
In February 2005, Singapore halved to 10% its tax on property trust dividends for foreign investors. The Malaysian government may also consider allowing tax-free dividends at the unit holder level for a five-year period.
For the housing development industry, the government is expected to announce a package of incentives to initiate the 10:90 variant of the build-then-sell concept of housing development. These include shortening of the approval time for land and development plans from the present one to two years to just four to six months; exemption from paying the RM200,000 deposit and stamp duties; and also adjusting the ratio of low-cost houses to medium-cost range type.
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