Strike a right balance between fueling growth and curtailing debt, says OCBC economist


  • Business
  • Friday, 11 Oct 2019

OCBC Bank chief economist Selena Ling

KUALA LUMPUR: Finance Minister Lim Guan Eng will have to strike a right balance between the cyclical need of juicing up growth at a time of heightened global uncertainties, and the structural necessity of curtailing government debt build-up, said an economist.

OCBC Bank chief economist Selena Ling said at the broadest level, by pencilling in a 3.2% fiscal deficit target as a proportion of GDP in 2020, he has managed to walk the middle way of some consolidation from 3.4% deficit expected this year and the original 2020 deficit target of 3.0% that he had first telegraphed last year. Any target of heavier consolidation been postponed, to a relatively vague promise of an average of 2.8% “over the medium term," she noted.”

She said budget 2020 has also assumed a much more realistic Brent crude price of US$62 per barrel, compared to US$72 previously.

Petroleum revenue is slated to reach RM50.5bil, about 2% lower than the 51.4bil expected this year, excluding the RM30bil one-off dividend. Given the lower total revenue figure of RM244.5bil (vs RM261.8bil of 2019), however, the proportion that petroleum revenues contribute to the total has stayed relatively high at 20.7%, compared to around 18% previously, Ling said.

The still-high ratio of petroleum contribution might be less of an issue now with a lower built-in crude price assumption but may be an area of focus once more should oil price refuse to cooperate through the course of 2020.

To bury the talks of any GST re-introduction once and for all, she said: "With that, its successor SST regime is expected to take up the burden, slated to increase by 5.6% to RM28.3bil, representing about 11.6% of total revenue. While the Prime Minsister has said that the country should focus on improving the structure of the SST rather than abandoning it, the budget speech today does not mention any new measure such as reducing the exemptions list that might have helped the tax take.

"One area in which market might latch on as it digests the budget speech further is the relatively lofty growth expectation for 2020 of 4.8%, which is higher than the 4.7% revised 2019 forecast that the government has.

"For context, the consensus forecast is at 4.3% while we have a more sanguine 4.2% pencilled in. In his speech, the minister did not spell out exactly how the ambitious growth target can be achieved, but we can surmise that it rests heavily on supporting the domestic consumption," Ling added.

For one, the government has increased its allocation for subsidies and social assistance by 2.6% to RM24.2bil in terms of welfare assistance, cash handouts, education assistance, etc, she said.

Toll payments will also be reduced. While fuel subsidies remain, she said there is a move towards greater rationalisation by gearing the subsidies towards the more needy, proxying by vehicle size and age.

In what is by now a perennial group to be taken care of, no matter who is in power, the budget is also allocating support measures for the civil servants, including an increase in living allowances and easier redemption of accumulated leave days. Given the size of the civil service – at 1.6 million strong, more than 10% of working population – such measures are not to be ignored altogether.

Meanwhile, Ling said minimum wage level will also be increased further to RM1200 per month for major cities in 2020, compared to RM1,100 currently.

Overall, however, even as these measures will help cushion private consumption – which is an important part of the economy at close to 60% of the total GDP by expenditure – OCBC Bank still think the overall growth target might be hard to reach.

"That is because, while private consumption is still expected to grow relatively healthily, other engines of the economy might not be as robust. Specifically, we see the investment cycle experiencing some challenges in the periods ahead.

"A slump in the capital goods imports of late may be a sign that there is likely to be a slowdown in fixed capital formation, which comprises nearly a quarter of the economy. Meanwhile, even though exports may look like they are not a sizable contributor to growth in net-of-import terms, any marked slowdown in the global trade cycle would lead indirectly to employment and spending pullback," she said.

GDP growth would affect the deficit target in a few ways, starting from the denominator effect.

All in all, Ling said while we do not think that reaching the 4.8% growth assumption and hence 3.2% fiscal deficit ratio target, as being impossible, the bank see the need for quite a few stars to be lined up for them to come true in 2020.

One of those stars will include no more escalation in trade tensions between US and China in the coming months, unavoidably. Let’s hope that is indeed so, She added.

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