Saturday, January 23

Malaysia Budget 2021: Perseverance in the face of challenge


Much like many other countries in the world, Malaysia is facing a resurgence in Covid-19 cases. Against the backdrop of Covid “waves”, a series of fiscal stimulus have been injected by the government in efforts to help pandemic victims and the ailing economy in 2020.

Looking towards the Malaysian equity market, the FBM KLCI Index has largely recovered its losses suffered during 1Q20.

However, the recovery in the index was largely attributed to the healthcare sector, covering up much of the wounds suffered by other sectors such as financials. In this article, we look to highlight some of the key points of Budget 2021 as well as the potential implications on the economy and equity market.

Key Economic Data for Budget 2021:

• Malaysia GDP forecast: 2020: 4.5 per cent, 2021: 6.5 to 7.5 per cent

• Government revenue: RM227 billion (2020) versus RM237 billion (2021)

• Operating expenditure: RM226 billion (2020) versus RM237 billion (2021)

• Gross development expenditure: RM50 billion (2020) versus RM69 billion (2021)

• Fiscal deficit: 2020: minu 6 per cent, 2021: minus 5.4 per cent

• Government real debt and liabilities: RM1.3 trillion (as of end June 2020)

Budget 2021 amounts to about RM322.5 billion, which is RM7.8 billion more than 2020’s budget. The budget emphasises on control and logistics behind managing the local Covid-19 pandemic situation.

Given that Malaysia is facing its third Covid-19 wave, the government was forced to reimplement targeted social distancing measures. Victims of the pandemic which includes the B40 category as well as the tourism sector have received notable attention in the current year’s budget.

That being said, the 2021 budget has also not left innovation out of the picture, as the government has pledged significant resources into building the infrastructure of high technology sectors while also pushing for more digitalisation initiatives.

Key Highlights in Budget 2020:

1. Covid-19

• RM1 billion allowances to curb the third Covid wave

• RM3 billion will be committed to procuring Covid-19 vaccine once available

• Tax relief for medical treatment expenses including vaccination costs up to RM 1,000

• Tax incentives for companies producing Covid-19 vaccines to invest in Malaysia


2. Tourism

• RM50 million for retraining 8,000 airline staff

• Special RM1,000 grant for traders, taxi drivers, e-hailing drivers, and tour guides in Sabah

• Human Resource Development Fund levy exemptions for companies in the tourism sector and those still affected by Covid-19 for six months

• Wage Subsidy Programme extended for another three months at a rate of RM600 per month for workers earning RM4,000 and below. Limit of 200 employees per application raised to 500 employees

With the local pandemic situation still at large, the economy is unable to resume in full swing. Thus, a major component of the budget revolves around pandemic control efforts.

Resources were allocated for Covid-19 supplies while also putting aside a sum for the vaccine once available. Looking towards the tourism sector, the ongoing assistance provided to this sector is expected to continue in the form of fiscal injections in 2021.

With much of the downside likely to have been priced, further downside risk could be limited especially if there are positive developments around the vaccine in the future.

Much-needed assistance gives breathing room to many:

1. EPF

• EPF contribution for employees reduced from 11 to nine per cent for 12 months beginning January 2021

• EPF contributors can withdraw for general use (Account 1) and purchase insurance (Account 2)

2. Taxes

• RM3,000 tax exemptions for contributors to private retirement schemes (PRS)

• One per cent decrease in income tax for those earning between RM50,000 to RM70,000 per year

• Tax incentives for certain industries will be extended to 2022


3. Citizen Assistance

• Bantuan Sara Hidup (changed to Bantuan Prihatin Rakyat), in which families will receive varying amounts of cash handouts depending on income range and number of children

• RM200 million allocated for the distribution of essential goods

• RM1 billion allocated for reskilling and upskilling programmes

• RM2 billion to continue PenjanaKerjaya programme under Socso

• RM1.5 billion to extend wage subsidy programmes for another three months

• 60 per cent of foreign workers’ monthly salary will be subsidised (40 per cent given to the employee, 20 per cent for local workers to replace foreign workers)

• RM3.7 billion for Skim Jaminan Penjanaan Pekerjaan to create jobs and improve skills

• Stamp duty exemption for first homes up to RM500,000

• Selected financial institutions to provide a rent-to-own scheme involving 5,000 PR1MA homes

• RM1.2 billion for the provision of homes for low-income house buyers


Infrastructure investments

• High-Speed Rail project will be continued, with RM3.8 billion worth of infrastructure jobs

• RM1.4 billion for the development of domestic supply chain and local products including medical devices

• RM3.7 billion to extend several schemes for maritime and logistics development, sustainable development, tourism infrastructure, and public transportation sectors

• RM2 billion in targeted aid for SMEs

On top of the broad-based tweak in EPF contribution percentage, assistance towards the citizens are geared towards pandemic victims – those that have lost their jobs as well as the B40 segment.

Easing the job-finding process is also a focus in this category given the significant amount allocated. On the other hand, the government has not only continued Bantuan Prihatin Rakyat (previously known as BSH) but also expanded the scope to allow more families and single individuals to be eligible.

Various tax initiatives were also introduced such as tax exemption for PRS contributors.

Given the continuing assistance towards the B40 segment, consumer staples are likely to remain resilient considering that a majority of expenses of this population segment are essential goods.

Furthermore, with the assistance provided to affordable housing for low-income house buyers as well as stamp duty exemptions, lower to mid-range property developers are likely beneficiaries.

Last but not least, sectors that typically have a high reliance on foreign workers such as the plantation and construction sectors could benefit from such initiatives.

Longer-term goals are not excluded:

1. Digitalisation

• RM1.5 billion to provide B40 access to internet services

• RM 180 provided to B40 for telecommunications expenses

• Telecommunications companies will prepare RM1.5 billion in free data

• RM500 million to ensure the connectivity of 430 schools throughout Malaysia covering all states

• RM7.4 billion to build and upgrade broadband services for 2021 and 2022

• GLCs to contribute RM150 million for the purchase of laptops for schools

• RM3 billion worth of guarantees with improved T&C for companies in highly-skilled industries

• RM150 million for the Shop Malaysia Online initiative

2. Innovation

• Income tax exemption of 50 per cent from the invested amount of RM50,000 given to equity crowdfunding (ECF) platforms

• RM30 million allocated as matching grant invested to ECF platforms

• RM400 million for selected parties to carry out research and development (R&D) initatives

• RM150 million for training programmes and assistance for 100,000 entrepreneurs

• RM1 billion to encourage investments in technology, including R&D for the electronic and aerospace industries

• RM500 million to support companies involved in advanced technology and innovation

• While Budget 2021 emphasizes Covid-19 victims, it appears to not left out digitalisation in the overall equation to prepare Malaysia for Industry 4.0.

Enhanced connectivity and the push for digitalisation measures could lead to more people gaining online access which opens up lifestyle alternatives (such as online purchase, cloud storage, gaming).

We see the efforts of building Malaysia benefiting from Industry 4.0 to be a positive sign for the local technology players.

Given the connectivity provided by the internet, previously unrelated industries are now able to benefit from each other. (eg: visiting an online doctor for healthcare needs which could turn into data for healthcare companies).

As such, we opine the upside potential for companies benefiting from this secular trend to remain attractive despite the perceived high valuations associated with these sectors.


All in all, the budget appears to have addressed the current pain points of the economy. The current budget has increased significantly compared to 2020.

That being said, we think that additional fiscal support is likely to be in the pipeline in 2021, providing much-needed support to ailing sectors.

As of end-Oct, FBM KLCI Index’s earnings growth for FY21 and FY22 is 10.5 and 9.4 per cent respectively. These figures bring the PE ratio to be 15.5 and 14.2 for both periods.

Against our fair PE ratio of 16 times, this represents a potential upside of 3.2 and 12.7 per cent for FY21 and FY22.

Despite the challenging outlook for Malaysian equity, investors should not completely exclude Malaysian equity from their portfolio as timing the market profitably over the long term may be unsustainable.

Currently, the downside risk appears to be limited as macroeconomic data such as exports and PMI have shown signs of recovery.

Although political uncertainty lingers on the horizon, the probability of political turbulence is likely to be lower than pre-Covid-19 conditions as resolving the current pandemic is of topmost priority.

Last but not least, given that pockets of opportunities reside within the Malaysia equity universe (eg: semiconductor), we maintained the star ratings for Malaysia at 3.0 stars “Attractive”.

For investors who are looking to gain exposure to the local equity markets, they can leverage on the expertise of local funds such as Eastspring Investments Equity Income Fund and Kenanga Growth Fund.