KUALA LUMPUR: Malaysia’s fiscal deficit is expected to increase to between 5.8% and 6% of GDP this year following the implementation of the government’s stimulus programmes to offset the severe fallout from the Covid-19 pandemic.
Finance Minister Tengku Datuk Seri Zafrul Aziz said during a Webinar on June 9 hosted by Maybank Investment Bank Research the Economic Recovery Plan (Penjana) will bring the budget deficit up to 5.8%-6.0% of GDP.
According to Maybank IB Research over 300 participants dialed in consisting of fund managers, corporate clients, Ministry of Finance and Bursa Malaysia officials, and Maybank officials and he addressed a wide range of questions.
Zaful had said the earlier Prihatin programme raised the budget deficit to 4.7%-5.0%. Total fiscal injection of both Penjana and Prihatin was RM45bil, of which RM35bil was under Prihatin and RM10bil under Penjana.
During the Global Financial Crisis in 2008-2009, Malaysia’s budget deficit reached 6.7% of GDP.
Zafrul said the expected budget deficit was also based on the assumption crude oil price would around US$30 a barrel (annual average) which impacts 20% of government revenue.
“But the good thing is crude oil price has improved to around US$40/bbl. Given the focus is to stimulate the economy, the last thing the government want to do is to focus too much on how to collect more revenues through taxation.
“But of course in the longer term, the fiscal discipline showed after 2009 (bring down budget deficit/GDP ratio from 6.7% in 2009 to around 3% by 2019) will be key towards achieving lower budget deficit as the economy stabilises and improves.
“The ‘comfortable’ budget deficit to GDP ratio is around 3%-3.2%, depending on how fast will the economy recovers, ” he said.
Among others, Penjana is estimated to impact real GDP growth by 30-40bps. As this year’s budget deficit/GDP is expected to be 5.8%- 6.0%, it will likely require the government to seek Parliament approval to raise the statutory Government domestic debt limit from the current 55%.
The official 2020 real GDP growth forecast remains at -2% to +0.5%, while that of average oil price is US$30/bbl.
On whether MOF would consider a special dividend from Petronas this year like in 2018 in order to help in public spending, Maybank IB Research, quoted Zafrul as saying: “2018 special dividend from Petronas was because of tax refunds. Not looking at it this year. Not saying the government will never ask.”
On whether the MOF was open to additional foreign borrowings to finance the deficit spending, perhaps another issuance of Samurai bonds, Zafrul said the government was not looking at any foreign debt issuances as there is enough domestic liquidity.
Current Government foreign borrowings at RM30bil vs RM35bil ceiling. The last issuance was last year’s RM8bil Samurai bond.
On a question whether there be further interest rate cuts to further stimulate the economy, he said MoF has no say on monetary policy i.e. Overnight Policy Rate (OPR) as it is BNM Monetary Policy Committee (MPC) decision as per the Central Bank Act 2009.
Zafrul’s personal view was there is probably no need for further OPR cut amid ample liquidity.
Maybank IB Research said on the wide range of questions from participants, key takeaways include:
• Key to manage sovereign credit rating risk is to have a plan to reduce budget deficit in the longer term and commit to fiscal reform e.g. looking at recommendations by Tax System Review Panel and Bank Negara-World Bank study on review of investment incentives, so all options including bringing back GST, introducing new taxes, and tax incentives for high-value added investments and activities are being considered; Fiscal Responsibility Act 2021.
• Government will continue and remain committed with the implementation of all projects allocated in Budget 2020.
• Further OPR cut is not necessary in the Finance Minister’s personal opinion in view of ample domestic liquidity conditions currently, which also means budget deficit will be funded by domestic sources i.e. no plan for foreign borrowings.
• Banks are encouraged to selectively aid customers, especially the low-income households and hard-hit sectors, after the end of the loan moratorium in September 2020.
• There will be additional announcement on the conditions for the RPGT exemption for disposal of residential homes from June 1,2020 to Dec 31,2021 (on top of it being limited to the disposal of 3 units of residential homes per individual) announced under Penjana.
• Current crisis presents the opportunities to undertake structural reforms such as promoting Industry 4.0, re-skilling and up-skilling labour force, reforming the education system, and being very strategic and selective in attracting and promoting investments.
• Investment is key to sustainable growth, and among others the Government will attract FDI especially to take advantage of the likely re-configuration and re-alignment of global supply-chain, and there will be more measures for domestic investment in Budget 2021.