THE stronger than expected second quarter (2Q22) gross domestic product (GDP) growth of 8.9% was certainly a welcome relief for Malaysia.
This is as the nation battles against surging commodity prices via increased subsidies while the opening up of the economy saw the manufacturing and services sector recording strong momentum with a growth of 12% and 9.2% year-on-year (y-o-y) respectively.
Domestic demand, which accounts for 92.7% of the economy, was stellar, rising by 11.7% y-o-y, primarily driven by private sector consumption, which expanded by 11.2% y-o-y.
Of course, the strength of the 2Q economic data was also helped by the base effect as the 2Q period last year was mostly impacted by the various movement control orders in May and June 2021, which was gradually eased between July and September last year as the National Recovery Plan kicked in.
GDP to expand by 6.5% in 2022
With the strong 2Q22 GDP growth data, the momentum is likely to be carried through in 3Q22, as last year’s 3Q and 2Q GDP value in real terms was very much the same at about RM336.1bil.
Thus, even if Malaysia’s 3Q22 GDP in real terms is equivalent to the pre-pandemic level of RM361.1bil as seen three years ago, the Malaysian economy will again likely show strong GDP growth of 7.4% y-o-y in the current quarter.
This is already a conservative assumption as the 2Q22 GDP value in real terms was 4.7% higher than the 2Q22 GDP output of RM349.9bil three years ago.
On the assumption that the economy in real terms has an unchanged output level on a quarter-on-quarter basis, the 3Q2222 GDP growth will again hit another 8.9% headline number.
No wonder, the consensus median estimate for the Malaysian economy has been raised by 0.8 percentage points to 6.5% against 5.7% earlier and is now even above the upper end of Bank Negara’s guided growth rate of 5.3%-6.3%.
Smaller deficit despite higher subsidies
With the government’s tight budget, especially the burden of funding subsidies to the tune of RM77.7bil as predicted earlier for this year, the first half report card of the government’s financial management has remained well within the budgeted numbers.
In fact, the data released by Bank Negara showed the government’s revenue expanded by 16.8% to RM124.3bil and if one were to annualise the figures, the government’s revenue for 2022 is set to increase to at least RM250bil.
However, as revenue for the 2H is generally higher than the first half, by about 20% over the past five to six years, plus potential additional revenue from PETRONAS in the form of taxes and dividends of about RM15bil, as well as taking into consideration higher revenue due to Cukai Makmur, the government’s revenue will likely hit about RM282.2bil for the full year, up 20.7% y-o-y.
On the expenditure front, government total expenditure in the the first half rose by 10.6% y-o-y to RM129.8bil, and annualising the figure suggests that the government’s total expenditure may hit RM280.7bil on the assumption that additional subsidies will be another RM25bil from the budgeted figures in the second half period.
To recap, the government had previously estimated that the total subsidy and cash assistance this year will be RM46.7bil more than the budgeted amount of RM31bil.
However, as commodity prices have eased, there is a strong likelihood that the final subsidy amount would be less than the RM77.7bil that was estimated recently.
The Covid-19 funding and net development expenditure, which hit RM9.5bil and RM30bil in the first half of 2022, were below the targeted expenditure of RM23bil and RM75bil, respectively, if the figures for the first half period are annualised.
However, it is likely that the government will step-up its expenditure programme in the second half of the year, but may still fall short of the budgeted figures as the economy has fully opened up and at the same time, the government is expected to reduce some development expenditure.
It is estimated that the two items will likely end the year at RM18bil and RM70bil respectively, which in total is a RM10bil reduction from the budgeted figures (see table).
As Malaysia continues to run a deficit in managing the economy, the deficit can only be financed by borrowings.
As it is, the statutory debt and GDP and federal government debt and GDP ratios have increased marginally at the end of June to 60.4% and 63.8% from 59.9% and 63.4% as at end of 2021 respectively.
Both the figures are likely to deteriorate further by the end of the year due to increase in total debt by another RM41.5bil. Malaysia’s statutory debt and federal government debt is set to increase to RM1,012.3bil and RM1,066.3bil at the end of 2022, translating to a statutory debt and GDP ratio of 61.8% and federal government debt and GDP ratio of 65.1%. The budget deficit, which was estimated at 6% when Budget 2022 was presented, is set to end the year at a much better level of 5.3%, thanks largely to a potential reduction in Covid-19 funding and net development expenditure as well as improved revenue collection, despite higher subsidies.
However, if the Covid-19 and net development expenditure hit the budgeted figures, the nation’s budget deficit will be at 5.9%, a shade below the estimated 6% figure.
Correspondingly, the statutory debt and GDP and federal government debt and GDP ratio too will increase to 62.4% and 65.7%, respectively.
An early GE15?
Over the past week, there has been renewed optimism that the government is confident of calling the 15th general election (GE15) as early as next month or in October as the economic data released last Friday shows the government has been able to manage its finances well despite the challenging environment of rising prices as well as the increase in subsidy bill.
With the economic growth forecast set to even surpass both Bank Negara and the Finance Ministry’s estimates and coupled with potentially better budget deficit figures, the time is right for the sitting government to call for the polls.
However, as Parliament’s third meeting of the fifth session only commences from Oct 26, which coincides with the tabling of the 2023 Budget two days later, any dissolution of Parliament before the tabling of Budget 2023 would mean that the tabling of the Budget 2023 will only be done after GE15.
Budget 2023 is unlikely to be brought forward as there is no parliamentary sitting between now and Oct 26.
For now, the ball is in the court of the Prime Minister to call for GE15 and it is likely now to be sooner rather than later.
As for markets, with uncertainty on the horizon as to the timing of GE15 and the outcome thereof, investors will likely turn cautious ahead of the polls.
Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.