The time has come once again to plan the country’s finances for the year ahead. Budget 2018 will be crucial as it comes prior to the elections, and its theme, ‘Shaping the Future’, bears weight.
As the General Election needs to be held on or before August 24, 2018, many market observers believe that Budget 2018 one will be people-friendly, filled with various goodies for the people, especially the lower income households.
The team at Affin Hwang Investment Bank Bhd (AffinHwang Capital) said despite the generous budget proposals to stimulate domestic demand, the federal government will still focus on fiscal discipline and likely incur a smaller budget deficit of 2.8 per cent of GDP in 2018.
This is compared with a deficit of three per cent of GDP in 2017, the lowest level since 1999.
“Budget strategies are planned on a favourable economic outlook The improvement to the budget deficit position in 2018 is premised on several factors.
“This include a synchronised improvement across both advanced and emerging market economies; manageable capital flows; steady commodity prices, especially global crude oil prices; steadier economic growth in Asia; and strong domestic demand with a stable ringgit.
“We believe government will likely revise higher the macroeconomic forecasts for 2017 and 2018.”
AffinHwang Capital believed the official annual GDP growth forecast for 2018 will likely to be increased to 4.5 to 5.5 per cent, in tandem with the assessment made by International Monetary Fund (IMF), which projected the global economy to grow at a faster pace of 3.6 per cent in 2018.
Setting the foundation for TN50
In line with the budget’s theme of “Shaping the Future”, the Government is expected to implement measures that would be favourable in achieving the TN50 objective. According to Prime Minister Datuk Seri Najib Razak, most of the inputs from TN50 roadshows and dialogues across the country would be considered under Budget 2018.
The Economic Transformation Programme (ETP), introduced in 2010, managed to arrest the downward trend in Malaysia’s economic growth.
“Growth slowed to 4.5 per cent in the ninth Malaysia Plan (9MP, from 2006 to 2010), before bouncing back to 5.3 per cent in the 10th Malaysia Plan (10MP, from 2011 to 2015) from an average of 9.5 per cent a year in the 6th Malaysia Plan (6MP, from 1991 to 1995),” AffinHwang Capital said.
“However, economic growth appears to be losing some momentum again – as it is estimated to grow at an average 4.8 per cent a year in 2016 to 2017.”
Towards this end, the government provided an early glimpse of its next transformation programme – termed as TN50 – which was announced in last year’s budget. Along these lines, the theme for the upcoming 2018 Budget is “Shaping the Future”.
This represents, in Affinhwang Capital’s view, a shift in focus from previous budgets – that of fiscal discipline – to one that emphasises on the country’s aspirations for the next 30 years under TN50.
“It also means the government would likely place a lot more emphasis on economic development that uses technology to make advancements,” it added.
Engaging the public opinion
To get feedback from the public, the government had set up a special interative website, https://bajet2018.najibrazak.com.
The website was open from September 4 to 18 with 14 categories in the website which are of relevance and importance to be presented. Among them were digital economy, the cost of living, housing and urban life, healthcare services, transport and infrastructure, rural development, environment and agriculture, youth and sports, culture and tourism, public safety and transparency.
On September 20, Najib said 13,837 ideas and proposals were received through the Budget 2018 ‘crowdsourcing’ campaign carried out for 15 days from September 4 to 18.
The Prime Minister said a preliminary scrutiny found that jobs, cost of living, education, taxation, commerce and finance as well as transportation and infrastructure were among the hot topics raised and thus reflected the priority of the people today.
He said all suggestions have been noted down and are seriously scrutinised for consideration by the government.
“This is an appropriate move towards democratising the process of drawing up the national budget, a document that would have a significant impact on the direction that the nation is heading for,” he added.
“I understand that many people were also calling for tax exemptions to help in tackling the cost of living for the middle income group, tax exemptions for sports activities and tax exemptions for the maintenance of private vehicles,” he added.
Keeping up with costs of living
Meanwhile, the outcome of a separate study entitled ‘Public Perception Towards the 2018 Budget’ indicates the people are looking forward to effective measures and more benefits to keep up with the rising cost of living.
The nationwide study conducted by KAJIDATA reveals the benefits outlined in the budget will help them tide over the rising cost of living and help the country forge ahead.
KAJIDATA’s computer-aided telephone interview study was carried out from July 26 to Aug 4, 2017 using random stratified sampling with 1,039 respondents from all levels of the society.
Established in 2015, KAJIDATA’s mission is to effectively acquire and see beyond data and unearth actionable insights.
The study was conducted to gauge public awareness on the tabling of the 2018 Budget and to evaluate public perception on the measures introduced in the 2017 Budget.
Professor Syed Arabi Aidid, KAJIDATA’s advisor, said respondents from the B40 segment, those earning below RM3,000, wanted the government to continue looking into their plight in the 2018 Budget.
“The findings note that 90 per cent of the respondents want the government to continue giving emphasis on comprehensive healthcare, employment opportunities, and help senior citizens above 65 and single mothers to sustain themselves.
“They also hope that the people’s cash aid scheme BR1M will continue in 2018, with 69.6 percent of the respondents saying the BR1M announced in the 2017 Budget has achieved its objectives in helping the deserving group,” said Syed Arabi, who is also the former rector of the International Islamic University Malaysia.
In their 2018 Budget wish list they also want to see the government doing more to enhance the quality of education (89.6 per cent), reduce the cost of living (88.8 per cent), improve public transportation (87 per cent), spend more on development and infrastructure (82.4 per cent) and continue to subsidise selected items (80 percent).
This week, BizHive Weekly explores potential thematic plays that could be the highlight of Budget 2018:
1. Boosts for digital economy
The digital economy initiative will continue to get the support in the 2018 Budget, said Malaysia Digital Economy Corporation (MDEC) chief executive officer Datuk Yasmin Mahmood.
She said the budget wish-list would most likely remain the same as last year with the main focus on digital economy.
“Our leaders (government) are fully aware of the impact on the digital economy’s growth for the country.
“Last year was evidence of the digital economy’s impact with multi-programmes, such as ‘eRezeki’, which left a great momentum,” she told reporters on the sidelines of the Big Data Week Asia 2017 recently.
Yasmin said last year, the focus was on the start-up ecosystem and the momentum would continue for a couple more years.
A total of RM162 million was allocated to MDEC in Budget 2017 for programmes such as e-commerce ecosystem and Digital Maker Movement as well as the introduction of the Malaysia Digital Hub.
On this note, Najib said digital connectivity was a revolution in economic activity, contributing nearly 16 per cent to the nation’s gross domestic product.
Yasmin said, to help Malaysia lead the digital economy, MDEC will be working with relevant partners to develop a national Artificial Intelligence (AI) framework.
“What we need to do is to ensure to look at the progression and evolve our existing big data. AI has been around for quite sometime now and the country is moving into its realms,” she said, adding it would be a critical extension to the National Big Data Analytics Framework.
Meanwhile, research firm RHB Research Institute Sdn Bhd (RHB Research) in its Budget prelude report expect several measures to boost digital economy.
“Some of the measures that may be implemented include incorporating ride-sharing services and the digital economy into the tax system,” it added. “The Government is likely to introduce taxes for e-commerce businesses, albeit at a low rate to encourage registration of businesses.
“Already, the Malaysian Royal Customs Department is planning on introducing provisions to the GST law that would enable taxation of foreign digital services providers,” it added. “Also, legalisation of ridesharing services is expected to be roped in the taxation system.”
The government would also likely introduce Budget measures to shore up internet connectivity in following up with last year’s budget announcement.
“The government aims to cut prices of broadband services and improve the quality of internet connection. Also, the Government is envisaged to improve internet connectivity as well as IT equipment in public schools and universities.”
It also expects an increase in allocation to Malaysia Digital Economy Corporation (MDEC) to drive the growth of the digital economy.
This is likely to be done by continued implementation of the Digital Free Trade Zone (DFTZ), the application of Internet of Things (IoT) into the technological eco-system and the expansion of e-commerce.
The latter may be done by implementing tax breaks in online sales, to attract businesses to apply ecommerce into their business structures, RHB Research said.
2. Focus on SMEs
Second Finance Minister Datuk Seri Johari Abdul Ghani on September 5 hinted that the government may increase fund allocation for small and medium enterprises (SME) under Budget 2018 to further develop SMEs and support broader economic activities.
SMEs formed an important component of the Malaysian economy as the segment accounted for some 36 per cent of the country’s gross domestic product (GDP).
“About 98 per cent of businesses in Malaysia are actually SMEs, and out of that, 65 per cent contribute to the employment and in terms of GDP, SMEs contribute almost 36 per cent, and 18 per cent of SMEs contribute to our total exports. I think it is a very significant portion of this ecosystem that we need to give focus on.
“Obviously if you look over the years, I think we keep increasing the figure that we keep giving the SMEs through the financial system known as Credit Guarantee Corp and even right to the smaller one like Tekun Nasional,” Johari said after Malaysia Debt Ventures Bhd’s fund launch.
CIMB equally hopes for the government to emphasise the digital and knowledge economy, as well as small and medium enterprises (SMEs) in the upcoming 2018 Budget.
Group chief executive officer Tengku Datuk Seri Zafrul Aziz Tengku Abdul Aziz said this is in continuation of the previous budget, as well as the government’s ongoing efforts at improving the SME sector.
“The government recently launched policies emphasising innovation and creativity, especially for the SMEs,” he told reporters on the sidelines of the Khazanah Megatrends Forum 2017.
He said the financial sector, as a strong industry, needs to play a bigger role in developing SMEs, especially in terms of innovation and expansion into the region.
RHB Research believed the government will provide further incentives for SMEs to further stimulate their growth in the periods ahead, following with its intention to push SMEs’ contributions to GDP to 41 per cent by 2020, and the share of the country’s exports from SMEs to 23 per cent.
Among the measures that the government would implement include improving financing to SMEs.
A survey by the Associated Chinese Chambers of Commerce and Industry (ACCIM) indicated that 43 per cent of SMEs still have issues in obtaining financing. The government is expected to increase its loan financing to SMEs through Credit Guarantee Corp and Tekun Nasional.
There could also be a possible reduction in the tax rate for SMEs.
“The Government may cut the tax rate on chargeable income further to 17 per cent, after slashing it to 18 per cent in 2017. This is to improve SMEs’ competitiveness in the economy.
“The government could also reimplement the Market Development Grant (MDG). We expect the government to reinstate the MDG, which was suspended in January. This would be
in tandem with the government’s efforts to strengthen Malaysia’s exports, after contributing most to Malaysia’s economic growth in 1H17.
“This is along with the continued funds allocated through the National Export Promotion Funds, channeled through Malaysia External Trade and Development Corporation (Matrade) and SME Corp.”
3. Initiatives for tech development
Meanwhile, Khazanah Nasional Bhd, expects Budget 2018 to have initiatives to promote the development of technology.
Managing director Tan Sri Azman Mokhtar said this was in line with the government’s aspiration for the Transformasi Nasional 2050 (TN50) plan, which strove to optimise the use of technology for future development.
“TN50 is something the government is working on. Khazanah in also contributing to this process in looking to the future, where we want to use the best of technology, to produce better development for everyone,” he told reporters on the sidelines of the Khazanah Megatrends Forum 2017.
Khazanah, as the government strategic investment agency, has been actively investing in technology companies. To date, the government investment arm has invested US$1 billion or RM4.22 billion in 25 technology companies globally after seeing huge potentials from its investment in Chinese online trading giant Alibaba.
“We have made a good investment in Alibaba and we are sitting on unrealised gains totalling US$1.4 billion,” he said.
Nevertheless, he said, Khazanah continued to balance its investment portfolio to benefit the nation not just in terms of financial.
“At the same time we talk about building through value as we help develop the country in our role as the strategic agency whereby value is not just financial but also from economic, strategic and societal,” he said.
He said, on average, Khazanah invested in not more than 20 companies annually.
For every investment decision, he said, Khazanah would evaluate between 30 and 50 potential investments.
On this point, RHB Research noted that Industry 4.0 is the latest evolution in the digitisation and automation of manufacturing processes.
Based on the Malaysia Investment Development Authority (MIDA), the government is currently drafting a national policy on Industry 4.0 which would be tabled in 4Q17 in Parliament, while a National Industry 4.0 Taskforce is to be established to spearhead the Government’s policy and strategy.
Among the initiatives the government may impose include tax incentives targeted at Industry 4.0.
“Investment incentives and tax breaks for pioneers in fields such as automation, robotic development, big data, cloud services and so on,” RHB Research said.
“This would attract businesses to implement measures of Industry 4.0 into their operations.”
Another possibility is to increase funding for the soft loan scheme for automation and modernisation. The allocation is expected to increase substantially, from only RM1.5 billion previously.
“At the same time, MIDA is expected to relax the rules for application to further encourage automation adaptation,” RHB Research said.
Other suggestions include higher allocation for training and re-training of staff and graduates.
“There may be higher provisions to extend the 1Malaysia Training Scheme (SL1Ms) by GLCs to 25,000 graduates in 2018 versus 20,000 in 2017.
“Also, a higher allocation of funds is expected for technical and vocational education and training (TVETs) institutions to enhance the local workforce to meet industries’ requirements.”
The government could also increase capital allowance on automation. For labour-intensive industries, the current capital allowance is at 200 per cent on the first RM4 million expenditure incurred on automation (for 2014 to 2017).
“The government is expected to increase this limit to encourage businesses to make the jump from labour-driven to machine-driven manufacturing.”
Improving costs of living
4. Efforts to tackle the rising cost of living
The issue of the rising cost of living has been a major talking-point for the past few budgets, and RHB Research believe the government will continue to tackle the issue by increasing its efforts in raising the income of the lower-income group (B40).
Some of the measures put forward include increasing salaries, benefits and allowances for civil servants. This comes as the government is expected to raise its special assistance of RM500 to public servants and RM250 to government retirees announced in Budget 2017.
“Income transfers to the B40 through Bantuan Rakyat 1Malaysia (BR1M) is due to be continued, with the allocation likely to increase to RM7.5 billion in 2018, from RM6.8 billion in 2017 and compared with RM5.4 billion in 2016,” it said.
“These include grants and write-off of debts totaling RM1.6 billion. These were announced back in July 2017, with the grants to be payable over five years.”
RHB Research also suggested incentives to increase income of the B40 segment, whereby programmes that encourage the B40 segment to engage in entrepreneurship would be continued, such as the mobileprenuer, agropreneur, and the eUsahawan and eRezeki programmes.
“Likewise, subsidies to aid fishermen, rubber tappers and students would remain.”
The government may increase the tax relief for medical expenses, disability and early children’s education. Also, it might increase the lifestyle tax relief to RM2,700 per year, from RM2,500 in 2017, to assist with the rakyat’s needs to match the pace of technological advancements.
5. On affordable housing
Affordable housing continues to be an issue, mainly due to the lack of supply. As it stands, out of 12,994 units of residential properties launched in 1Q17, only 37.6 per cent — or 4,892 units — fell under the affordable category.
“Also, unsold units of affordable homes now account for 44.3 per cent of total unsold residential homes, up from 39.4 per cent in 4Q16,” RHB Research added.
“This indicates that the take-up rate for affordable homes remains subdued, likely due to financing issues.
“Thus, the government may address the issues by implementing measures like subsidies for buyers of affordable homes.
“This may be done especially for first time buyers, to increase the take-up rate of affordable homes. At the same time, we expect the Government to continue to waive stamp duty expenses for first-time buyers of affordable homes until December 2018.”
Meanwhile, tax exemption of 10 to 20 per cent of profit would likely encourage the developers to build more affordable homes, especially in areas experiencing a shortage;
This was on the back of the government announced that it will build 30,000 affordable houses under 2017 by Perumahan Rakyat 1Malaysia (PR1MA) and government-linked companies (GLCs).
“We envisage the government to increase the number of houses to 45,000 to tackle the lack of supply.”