Foreword

Budget 2024 is the first budget after the unveiling of the National Energy Transition Roadmap (NETR), New Industrial Master Plan (NIMP) and 12th Malaysia Plan Mid-Term Review (12MP) which are set shape the growth trajectory of the country going forward in the context of increasing economic complexity and fulfilling our net zero journey along the same tangent. On the back of challenging global economic environment, expansionary budget that remains in place to support the country’s growth agenda and at the same time, improving revenue stream is equally critical to ensure sustainable sovereign creditworthiness. In this regard, we welcome the government’s short-term and mid-term commitment of bringing down the fiscal deficit, as guided via the recent 12MP Review.

Fiscal position is set to improve

Fiscal deficit to GDP ratio is envisaged to narrow to 4.3% in 2024 and financing of the deficit should continue to be via domestic debt capital market, thanks to growing investible funds locally. This minimises the risk of excessive exposure to FX volatility in the government’s balance sheet.

Supporting the People and creating viable business opportunities

Cash handouts offered to ensure sustainable private consumption while elevated level of development expenditure to create business opportunities, hence benefiting SMEs along the value chain as well. Moves to support credit flows should also bode well for business communities as far as cash flows are concerned.

ESG agenda very much in place

Embracing Environmental, Social and Governance (ESG) is inevitable as this is becoming the global mega trend, hence it is not a choice, but a must. Budget 2024 that includes measures in supporting EVs ownership and drive toward zero carbon are testament to the government’s strategies on embedding ESG into the economy as spelt out in the NETR, NIMP and 12MP.

GDP growth is set at 4.0% - 5.0%

GDP growth is expected at 4.0% - 5.0% in 2024 based on the Ministry of Finance (MOF) forecast, underpinned by domestic demand and impending recovery in exports. The downside risk to growth, however, remains and is largely seen coming from external sources with regards to the major central banks monetary policy direction, the shape of China’s recovery in the coming months, trade tensions & protectionism measures and geopolitical uncertainties.

Budget 2024: RM393.8 billion allocation, 0.8% lower than 2023

Higher revenue collection expected in 2024 – Revenue is expected to be 1.5% higher at RM307.6 billion with 79.2% contribution coming from tax revenue while the remaining 20.8% is to be contributed from non-tax revenue. Key highlight of government revenue in Budget 2024 are as follows:

• Tax revenue of RM243.6 billion – Largest contribution coming from direct tax (RM185.0 billion) and followed by indirect tax (RM58.6 billion).

• Sales and Services Tax (SST) – With Services Tax is increased to 8%, the SST collection is projected at RM35.8 billion. However, this increase does not include services such as F&B and telecommunications.

• Lower Petronas Dividend is expected – Given crude oil price assumption of USD85/barrel, dividend contribution from Petronas is anticipated at RM32 billion in 2024 as compared to RM40 billion in 2023. For the record, Petronas had paid RM19.9 billion to the government as of 1H2023.

Higher operating expenditure in 2024 – RM303.8 billion is allocated for operating expenditure, about 1.2% higher than RM300.1 billion budgeted in 2023. Key highlights of operating expenditure are as follows:

• Emoluments – Emoluments remain the largest chunk of the overall expenditure with RM95.6 billion, or 31.5% of overall. The increase is due to the annual increment and new hires filling in critical positions, especially in the health and education services.

• Subsidies & assistance – The second biggest component is spending on subsidies & assistance, with RM52.8 billion out of total allocation. The reduction is primarily due to the gradual implementation of subsidy rationalisation.

• Debt service charge – The third largest component is the debt service charges, with RM49.8 billion of allocation.

Development expenditure of RM90.0 billion - As indicated during the recent 12th Malaysia Plan Mid-Term Review (12MP), allocation for development expenditure remain somewhat robust and this should work well in sustaining economic growth going into 2024. Key highlights of operating expenditure are as follows:

• Economic – RM45.2 billion allocated for the economic sector, where the biggest beneficiaries are the transport sector (RM19.1 billion) and trade & industry (RM3.6 billion).

• Social – RM28.3 billion allocated, where the education & training is the biggest beneficiary with RM14.3 billion.

• Security – RM12.5 billion allocated, where RM7.4 billion and RM5.1 billion are channelled for defence and internal security subsectors respectively.

• General Administration – RM3.9 billion allocated to facilitate continuous improvement in public service delivery.

Government fiscal position – Fiscal deficit of GDP ratio is estimated at 5.0% in 2023, and it sets the tone towards long-term fiscal consolidation journey as well as 3.0% - 3.5% target under the 12MP. Going into 2024, fiscal deficit to GDP ratio is seen to narrow further to 4.3% on the back of RM85.4 billion budget shortfall and this is to be fully financed via local currency sovereign bond issuances. We analyse the fiscal consolidation path the country had embarked earlier on during the post-GFC period and found that fiscal deficit narrowed from a high of 6.7% in 2009 to 3.0% in 2017 with GST regime came into effect in 2015. Mapping this finding to the present scenario where our fiscal deficit peaked at 6.4% at the heights of COVID-induced recession, fiscal deficit may fall to 2.7% by 2029 should the same trajectory is replicated.

Source: AmInvest Research - 16 Oct 2023