THE Malaysian economy slowed to 4.5% year-on-year (y-o-y) in the second quarter of 2018, the slowest rate in five quarters since the second quarter of 2017.
The main drag on growth were contractions in the public investment, mining and agriculture sectors.
Household spending was still resilient while private capital spending was moderately higher.
Amid lingering uncertainties on the US-China trade spat, exports were still growing although the rate of expansion was comparatively lower compared to a year ago.
We face a number of domestic tailwinds and external crosswinds that increasingly pose risks to domestic growth outlook over the next six to 12 months.
Post GE14, a new political landscape and the ongoing policy transition and clarity of policy direction, including the cancellation, cost savings as well as the deferment of major projects, are expected to result in some adjustment in output growth.
Disruptive external forces putting global growth at risk are rising global crude oil prices, higher US interest rate and rising bond yields, strong US dollar appreciation, uncertainties over the US-China trade war, substantial pressures on foreign exchange markets, heightened fears of a currency crisis as well as political conflicts and risks.
While three major credit rating agencies (Standard and Poor’s, Moody’s Investors Service and Fitch Ratings) have maintained Malaysia’s sovereign rating outlook, its rating could face downward pressure if there is a weaker commitment to growth and fiscal consolidation.
The removal of the Goods and Services Tax (GST) and continued subsidies are credit negative for Malaysia.
A spending-led approach to budget repair
Our fiscal challenges remain daunting.
Federal revenue will face a substantial shortfall estimated at RM23bil due to the replacement of GST with the Sales and Service Tax (SST), and coupled with the resumption of fuel subsidies, the government is compelled to rationalise and reprioritise spending programmes and projects based on a selection and focus approach.
Higher operating expenses (83.6% of total expenditure and 97.7% of federal revenue) have to be trimmed further, especially for emoluments, supplies and services, which can see significant cost-savings.
I believe that zero-based budgeting, which prepares the budget from scratch and all expenses must be justified for each new period is a good budgeting method to achieve efficiency and reduce redundant activities.
It is probable that a higher budget deficit, estimated at 3.5% of GDP for 2019, would be targeted, in part because spending adjustments would not be compensated by moderate revenue growth estimates.
The global crude oil price remains the wild card as it would be a saviour for government revenue but it also means higher fuel subsidy if the government continues with the blanket subsidy of retail fuel price (RON95).
Indeed, at times of heightened global uncertainty and fiscal constraints, budgeting should have a cautious bias. A credible timetable for the budget repair must be clearly spelt out. This is the clear direction the credit rating agencies and market investors are looking forward to.
Reprioritisation of spending and programmes
Spending plans need to be re-evaluated in terms of priority and necessity as well as for their social and economic impact.
The reality is that public expectations on government spending and public services need to be realigned with the limited budget; some form of trade-offs are inevitable, going well beyond budgetary ‘business as usual’.
The spending rationalisation and new initiatives on health and education funding, socioeconomic development, affordable housing, infrastructure and income support payments as well as new tax measures have to be realistically and rationally implemented.
Five areas of focus
Structural reforms can be pursued incrementally, avoiding disruptive “big bang” changes on the economy, businesses and industries.
As we look ahead at the 2019 Budget 2019, the five priority areas for the Finance Minister will be as follows:
> First, ease cost of living in urban areas
An average household spend the most on food, accommodation and transportation.
Provide tax reliefs on rental payments and tuition fees for primary and secondary education; reintroduce RM100 unlimited LRT and bus rides as well as provide peak hour discounts for daily commuters;
On affordable housing, the government can initiate a Rental Affordability Scheme to increase affordable housing for low-to-moderate income households. The scheme offers investors an annual financial incentive to buy new, affordable homes and to rent them for at least 20% below market rents to low- and moderate-income households.
As part of corporate social responsibility (CSR) to help low and middle-income employees, government-linked companies (GLCs) and the private sector should be encouraged to provide discount food card at eateries operated in-house. Hawkers and food operators operating in the public food courts located outside and in the department stores to adopt best practice (fair price label), supported by strict price surveillance and enforcement.
> Spurring private investments
The immediate priority is to set up an independent panel to have a comprehensive review of cost of doing business, streamline regulatory practices and compliance cost to increase investment, encourage innovation and technology advancement.
Expedite the introduction of e-services and create an efficient system of e-procurement to ensure a competitive and transparent tendering and procurement.
Promote inclusiveness of GLC in supporting domestic small and medium enterprises via the liberalization of 30% of the procurement for non-bumiputras.
Extend reinvestment allowance and accelerated capital allowance (automation).
Some portion of the collected foreign workers’ levies amounting to RM2.8bil per year should be ploughed back into a designated Industrial Adjustment Fund to support automation and technology upgrading.
Review approved permits (APs) to encourage healthy competition and avoid rent seeking.
> Boost exports and capacity expansion
Increase the market development grant from RM200,000 to RM500,000.
Provide more grants for export promotion programmes (branding, packaging and international marketing) and further enhancement of exports through cost-efficient transportation, logistics and ports; trade facilitation and custom clearance (simplifying documents, streamlining procedures; market intelligence).
Increase R&D funding to encourage original equipment manufacturer (OEM), own design manufacturer (ODM) and original brand manufacturer (OBM).
> Focus on tourism, agriculture, e-commerce, healthcare, and IR4.0
> Upskill workforce and create jobs
Incentivise companies to increase female labour participation and provide tax allowance for the hiring of unemployed youths and encourage private sector to participate in the training scheme for fresh graduates.
Review the effectiveness of the Technical Vocational and Education Training (TVET) programme with a view of keeping pace with the demand of skills and innovation ability and encourage startups through tax credits and debt-to-equity scheme as well as the provision of advisory services.
Lee Heng Guie is an executive director at the Socio-Economic Research Centre.