High expectations from Budget 2023

 

THE upcoming Budget 2023, set to be tabled on October 7, is expected to be held under unique circumstances.

Faced with the threat of increasing inflationary pressures, as well as the likelihood of a General Election soon, the government has to find ways to strike a balance between ensuring the well-being of the people and the country’s economic sustainability for thiscoming Budget.

Malaysia’s economic growth started the year on strong grounds with the full reopening of the economy as the country transitions to its endemic phase.

According to Bank Negara Malaysia (BNM), the Malaysian economy registered a strong growth of 8.9 per cent in the second quarter of 2022 (from five per cent in 1Q22).

While growth was lifted to some extent by the low base from the Full Movement Control Order (FMCO) in June 2021, growth in April and May 2022 was particularly robust, underpinned by the continued recovery in labour market conditions and policy support.

BNM pointed out that the improvement also reflected normalising economic activity as the country moved towards endemicity and reopened international borders.

However, it cautioned that most major economies are expected to experience strong and persistent inflationary pressures, in an environment of elevated commodity prices and tight labour markets.

Central banks in major economies have also stepped up the pace of monetary policy tightening to tackle inflation and ensure inflation expectations remain anchored. Financial conditions are expected to tighten. All these factors could weigh on growth, it highlighted.

“Headline inflation is projected to trend higher in some months during the remainder of the year, due partly to the base effect from the discount on electricity prices implemented in 3Q21. Core inflation is expected to average higher in 2022, as demand continues to improve amid the high-cost environment,” it said.

However, the central bank pointed out that the extent of upside pressures on inflation is expected to remain partly contained by the existing price control measures, fuel subsidies and the continued spare capacity in the economy.

On top of persistent inflationary pressures – with the Budget 2023 brought forward to October 7 – speculators hint of a possible General Election before year-end.

Nevertheless, the government said it will ensure the Budget is prepared with the people’s wellbeing at its core by taking into consideration the challenges that await next year.

At the closing of the 2023 Budget Consultation programme at the Finance Ministry, Prime Minister Datuk Seri Ismail Sabri Yaakob said, “In facing global uncertainties, the 2023 Budget will also focus on the people by improving protection systems and boosting the wellbeing of the people through quality healthcare and education.”

Ismail Sabri said various issues and challenges were raised during consultations on Budget 2023, and solutions proposed to tackle the issues would be studied in detail.

Proposed solutions include taxation, subsidies, social protection, business continuity and industrial sustainability, including reducing the cost of doing business by boosting the development of human resources, skilled workers, productivity and business digitalisation.

He said there were proposals to strengthen cooperation between various quarters to expedite the implementation of the Sustainable Development Goals Agenda at the national level by 2030.

“As an open economy, we are not spared from global developments. Disruptions in the global supply chain has caused a steep rise in the prices of food and commodities,” he added.

He said as a result of this, the inflation rate in the first half of the year remained at a controlled level of 2.5 per cent.

He also noted the government’s allocation for aid and subsidy had risen to a whopping RM77.7 billion this year, compared with RM31 billion last year.

Meanwhile, Minister In The Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed remarked that the Budget 2023 is expected to continue to focus on strengthening the momentum of the country’s economic recovery and generating sustainable growth in the long-term, says.

He said the Malaysian economy is on solid ground supported by resilient economic foundations, pragmatic policies and diversified economic structures but the management of the country’s economy in 2022 is expected to be more challenging, he said.

“The world economic growth forecast in 2022 and 2023 by international organisations such as the World Bank and the International Monetary Fund (IMF) has been revised and lowered.

“The IMF has revised its global economic growth forecast to 3.2 per cent for 2022 in July from 3.6 per cent in April, and 4.4 per cent in January 2022,” he said in a statement.

Mustapa added that for 2023, the world economic growth forecast had been lowered from 3.8 per cent in January 2022 to 2.9 per cent in July 2022.

Commenting on the growth of the national economy, he said the gross domestic product (GDP) growth projection of the national economy is expected to reach a target of between 5.3 per cent and 6.3 per cent.

“This takes into account the 6.9 per cent achievement in the first half of 2022,” Mustapa said.

Mustapa also emphasised that the measures taken by the government in implementing stimulus packages and the gradual reopening of the economy had reduced the major impact of the Covid-19 crisis and also supported the economic recovery.

 

 

Economists’ hot take on goodies and sectoral possibilities

WITH the current condition of the economy and the possible upcoming General Election, analysts say the government is expected to balance between a market-friendly and ‘feel-good’ Budget.

In its Market Strategy report, RHB Investment Bank Bhd’s analysts (RHB Investment) pointed out that the current political dynamic and impending election suggest that the government would need to loosen its purse strings to engender a feel-good factor.

“Expectations are for a market-friendly Budget 2023 containing ‘goodies’ for individuals and businesses, but the quantum of handouts and pump-priming initiatives will be tempered by the lack of fiscal headroom – considering the expectation of a slowing economy in 2023, with investors also looking out for additional taxes on the private sector,” it said.

It also highlighted media reports suggesting that Ismail Sabri is being persuaded to conduct the GE15 as soon as 4Q22 – a theory that has been reinforced by the tabling of Budget 2023 on October 7, three weeks earlier than previously scheduled.

“With Barisan (BN) strategists confident that the electoral winds have shifted in their favour, we think no stone will be left unturned to ensure that the budget offers every assistance to the electorate at large, and to businesses to assist their recovery from the ravages of the pandemic.

“However, with the debt-to-GDP ratios creeping higher, coupled with a rising subsidy bill that will continue to escalate the later GE15 is held, we believe the government will need to be mindful of the fiscal deficit, and we cannot rule out new revenue-raising initiatives or the postponement of planned expenditures,” it opined.

RHB Investment thus expect the budget to emphasise on automation, technology and sustainability. The digitalisation drive could be positive for names like CTOS Digital, GHL Systems and Revenue Group.

“Social assistance initiatives may benefit the broader consumer sector,” it continued.

“More punitive taxes on the brewery and tobacco sectors are improbable, as it will likely prove to be counter-productive.

“We have low expectations on any significant incentives for the property sector. Construction may see headlines from some pre-polls pump-priming but this is likely to be skewed towards smaller contractors. Larger projects could still be announced, but these would require private funding requirements.

“Also, the government is unlikely to increase gaming taxes as the industry was badly affected by the pandemic.

“We also believe the NFOs will get to maintain 22 special draws in 2023 to maximise tax revenues. The automotive sector may receive a fillip from incentives to expedite EV production and adoption, with an outside chance of greater clarity on the forthcoming excise duty reform.”

Meanwhile, ratings agency MARC Rating Corp Bhd (MARC Rating) believe that economic restructuring should be implemented in order for the people to shift to the middle and higher economic level, from the current low-level economy where it is still largely dependent on low production costs and foreign labour.

According to a report by Bernama, MARC was quoted as saying that the government should be looking into restructuring the country’s economy starting with the 12th Malaysia Plan (12MP).

Group chief executive officer Datuk Jamaludin Nasir said, “We should relocate our resources to make sure that we are upping our economic value chain from the low-cost economy to the middle and higher economy by improving our local production, research and development and talents, parallel with how we are good at bringing good companies into the country.

“The restructuring (of the economy) should be taking place now when people are starting to be concerned about the country’s economy,” he told reporters after presenting the MARC Ratings’ Lead Managers League Table Awards 2021.

For the upcoming Budget 2023, he said it is also important that the government seriously look into implementing targeted subsidies so that the money could be used to help the growth of the country.

On a yearly basis, the government spends about RM60 billion to RM80 billion on subsidies.

Jamaludin also expected the Budget 2023 to continue to be an expansionary budget, with the focus to create more jobs and upgrading local talents’ skills and capabilities.

Meanwhile, on the performance of investment banks in the country this year, he said most of the investment banks are facing a challenge in view of higher interest rates.

“There is also lesser deal count as most potential issuers are taking a wait-and-see attitude. Following Fed’s latest interest rate hike, we are also expecting the Bank of England to also increase its interest rate by another 50 bps,” said Jamaludin.

 

 

More goodies for construction sector?

AS the General Election looms closer, eyes are on the construction sector as its progress mirrors the performance of Malaysia’s economic development.

However, the current state of public finances remains tight, considering Malaysia’s total debt-to-GDP ratio of 63.8 per cent as of end June 2022 (compared with 63.4 per cent at the end of Dec 2021), RHB Investment pointed out.

“While it is likely that a pre-election pump-priming theme could materialise, it may also be skewed more towards smaller-scale contractors.

“An association of contractors has urged the government to provide a special stimulus package in Budget 2023 to small contractors that are still facing problems brought on by the Covid-19 pandemic, namely for elevated building material prices, labour shortage, and higher logistics cost.

“Meanwhile, the president of the Malaysian Bumiputera Contractors Association stated that the Government could help small contractors by awarding maintenance work and other jobs in government departments,” it said.

It noted that based on data published by the Construction Industry Development Board (CIDB), G1 and G2 contractors make up more than half of the total circa 103,000 contractors in Malaysia as at September 5, 2022.

“In order to benefit this group of contractors, we think allocations may be tilted towards rural infrastructure or maintenance jobs,” it added.

In June, the Works Ministry said that it needs an allocation of RM3.4 billion to repair federal roads throughout West Malaysia. Senior Works Minister Datuk Seri Fadillah Yusof said this included repairing damages, resurfacing, adding extra layers and building new roads – all by next year.

The Works Ministry said it will ensure Budget 2023 to be tabled will focus on improving road facilities and conditions for the comfort and safety of its users.

Senior Works Minister Datuk Seri Fadillah Yusof was quoted as saying that in general, much emphasis will be given to providing improved facilities for the people’s well-being.

“For Budget 2023, we already have had sessions handled by the Finance Ministry in which KKR will give priority to improving roads.

“This includes using cost saving light-emitting diode lamps (LED) and also smart traffic lights that not only would provide comfort to road users but also help reduce traffic congestion.

“The smart traffic lights system we feel is more efficient. For example, if traffic is congested, the system will shorten waiting time,” he told reporters at an event earlier this month.

 

Special for Sarawak

As for East Malaysia, Sarawak Deputy Premier Datuk Amar Douglas Uggah Embas cited that Sarawak has around 3,487km of substandard roads that must be upgraded or rehabilitated to connect rural areas.

“At the moment, the cost of upgrading 331km of rural roads in Sarawak is roughly RM5 billion. The aforementioned points tie in well with Fadillah’s statement made on September 11 about focusing on improving road facilities for the people’s safety and comfort,” RHB Investment said.

There could also be a chance of large-scale projects being rolled out, via a public-private partnership (PPP) model.

“So far, a PPP model is already evident in the tenders for the Mass Rapid Transit 3 (MRT3), where bidders are required to propose financing for the initial two years of construction works worth at least 10 per cent of the contract value.

“Therefore, new project rollouts with a PPP model (aside from MRT3) could include flood mitigation aspects – which we believe are of priority, given the flood incidents in Selangor and Kedah.

“There should also be some pockets of opportunities from East Malaysia, namely the Sarawak-Sabah Link Road Phase 2 and the Trans Borneo highway, which was approved by the government in August,” the research team opined.

Nevertheless, it noted that a risk of low private sector construction participation may arise if contractors with strong balance sheets can no longer stomach such funding requirements as they take up more projects later on.

“As such, it would be reasonable to assume that the upcoming Budget 2023 may focus more on smaller contractors (which are mostly not public-listed) to enable a trickle-down effect that may benefit public welfare,” it added.

 

 

Consumers set to be biggest beneficiary

AS is usually the case every year, the consumer sector is expected to be the biggest beneficiary to the upcoming Budget 2023.

Some of the more predictable goodies such as cash handouts, bonuses for civil servants, and income tax relief can be expected in Budget 2023 – especially in view of the rising cost of living, RHB Investment predicted.

These possible measures would further support private consumption in 2H22 to continue driving economic growth – in line with the nation’s transition to endemicity.

“We also expect the government to continue prioritising the welfare of the B40 segment, through the provision of subsidies for necessities and monetary assistance,” it added.

Of note, earlier in July, Deputy Finance Minister I Datuk Mohd Shahar Abdullah noted that the fiscal sustainability of the nation will continue to be the Finance Ministry’s agenda and several incentives to achieve this objective is expected to be announced in Budget 2023.

He said to address the effects of the rise in prices of basic necessities, the government will continue to implement existing subsidies particularly consumer subsidy covering petrol, diesel, liquefied petroleum gas, cooking oil, flour, electricity, chicken, and eggs, as well as various social aids such as social welfare assistance including Bantuan Keluarga Malaysia.

The total subsidies and social assistance are projected to reach close to RM80 billion for 2022 which is the largest in the country’s history, he said.

 

 

Special emphasis on healthcare

SINCE the pandemic, focus has been on elevating Malaysia’s healthcare sector to better prepare ourselves for future incidences similar to the Covid-19 pandemic.

For thiscoming Budget, analysts anticipate higher allocation for the healthcare sector, with the bulk of it channelled towards the nation’s healthcare infrastructure to improve the quality and ensure the affordability of public healthcare services.

Aside from that, RHB Investment believe that the preparedness of the country to welcoming medical tourism should be on the MOF’s cards, and the budget allocation towards the Malaysia Healthcare Travel Council (MHTC) would likely be higher than that of last year following the re-opening of cross-border travel since April.

Recently, Health Minister Khairy Jamaluddin said the Health Ministry has submitted an application for six new initiatives totalling RM3.4 billion to the Finance Ministry to be included in Budget 2023.

“The six new initiatives proposed are the strengthening of the Healthcare and Wellness programme, with an estimated budget of RM738 million; improvement and repair of the ministry’s health facilities (RM791.5 million); and improving the effectiveness of healthcare treatment (RM850 million).

“It also includes the replacement of critical and obsolete medical assets (RM400 million); digitalisation of healthcare services (RM460 million); and appreciation incentives for medical personnel (RM183 million),” he told reporters during the ‘One-Year Achievement as Health Minister’ interview recently.

Khairy said the application to improve and repair the Ministry’s healthcare facilities as there were 2,732 government clinics in neglected condition, but still operating to provide healthcare services to the public.

 

 

Going green possible themes for property, automotive incentives

IN line with empower and intensify Sustainable Development Goals (SDG) programmes, the government will likely announce incentives with emphasis on ESG in the property and automotive sector.

RHB Investment noted that the government would likely introduce more incentives to encourage greater use of the Industrialised Building System (IBS).

In Budget 2021, the government proposed to extend the IBS tax incentive for five years. Companies that produce at least three basic IBS components, or use an IBS system with at least three basic IBS components, would be eligible for an investment tax allowance of 60 per cent on the qualifying capex for five years. This allowance can be offset against 70 per cent of statutory income every year.

It also pointed out that with the increasing emphasis on ESG, it believed that the government might also look into the environmental aspect by providing small grants to developers or waive the stamp duty for buyers of green certified projects.

“We understand that some companies have invested in renewable energy resources such as solar panels. However, to encourage greater energy efficiency, further incentives from the government are needed,” it added.

The research team also believe that, aside from providing greater clarity on excise duty reform, the government would likely introduce additional incentives to expedite the production and adoption of electric vehicles (EVs) in Malaysia.

“As the lack of EV charging infrastructure is among the key impediments of EV adoption becoming more widespread in Malaysia, we think Budget 2023 may include incentives to spur the installation of EV charging – which should then partially expedite the adoption of EVs.

“Currently, there are incentives for individuals for the purchase, installation, rental, lease, and subscription for EV charging until the end of 2023 – but none to encourage corporations to install EV chargers in public spaces.

“Incentives to spur original equipment manufacturers’ (OEM) local assembly of EVs could also be on the table.

“However, given the lack of EV sales volumes in Malaysia in the near future, OEMs may not be compelled to locally assemble EVs just for the Malaysian market.

“Therefore, we believe that the incentives should also encourage the export of locally assembled EVs. This would not only help boost local EV adoption, but also support the Government’s vision for the Automotive Hi-Tech Valley to be the Asean hub for EV manufacturing and component supplies,” it added.

The government could also introduce longer tax-free period for purchase of EVs, RHB Investment suggested.

“Currently, CBU EVs are exempt from import and excise duties until end-2023, and CKD EVs until end-2025.

“However, given that there are limited choices of EVs in Malaysia, and a lack of affordable EV models, there is very limited supply of CBU EVs to the Malaysian market, and there are limited CKD EVs, and any setting up of local assembly may take some time, only a handful of premium EV buyers can benefit from the existing tax-free period.

“As such, we gathered from industry executives that there should be a longer tax-free period for the purchase of both CKD and CBU EVs. Should the tax-free period be extended for a few more years, we believe that with more affordable EVs options in the coming years, more buyers (including those in the B40 and M40 groups) would be able to take advantage of the tax break,” it said.