Budget Highlights

• 2019 GDP Growth of 4.9% • B40 National Health Protection Fund

• 3.4% Fiscal Deficit Target for 2019 • Reduction of New House Prices by 10% by REHDA

• Federal Government Debt Target of 51.8% • Corporate Tax Reduction by 1.0% for SMEs

• Tax on Imported Services and Soda • More Affordable Housing Projects

• Revision Casino License and Duty • Implementation of B10 and B7 Biodiesel Mandate

Summary

The very first budget tabled by Pakatan Harapan (PH) administration after their historic win in Malaysia’s 14th General Election (GE14) – Budget 2019 was initially marred by a slew of negative perception with the potential introduction of new taxes and spending cuts as the government juggles between tackling the weak fiscal position and fostering economic growth. The theme “A Resurgent Malaysia, A Dynamic Economy, A Prosperous Society” is the fourth series under the 11th Malaysia Plan as the country gears up to be a high-income nation by 2024 (after pushing back from the targeted year 2020 in the recent 11th Malaysia Plan mid-term review). Despite the tight fiscal constraints, Budget 2019 aims to trim the country’s fiscal deficit to 3.4% in 2019, from 3.7% projected in 2018, supported by assets monetisation, coupled with higher dividends (including RM30.0 bln special dividend) from state oil company Petroliam Nasional Bhd.

Although there were uncertainties, clouded by slightly negative perception of new taxes and reduced government spending prior to the tabling of the budget, the actual contents were mostly welcomed by many with the rollout several goodies such as the continuation of financial assistance for the B40 households, additional affordable housing projects and subsidies on both tolls and petrol for the lower income groups. The introduction of B40 National Health Protection Funds safeguards the social welfare and separation of tax relief for EPF contributors, takaful and life insurance will eventually improve household disposable income in addressing the rising cost of living.

The Malaysian GDP is foreseen to grow at a rate of 4.8% Y.o.Y (lower than the previously estimated rate of 5.0% Y.o.Y) in 2018, although it is set to improve by 4.9% Y.o.Y in 2019, buoyed by resilient domestic demand and still firm external sector. Private sector expenditure growth (2018: +6.5% Y.o.Y, 2019: +6.4% Y.o.Y) will remain the key growth driver, partly alleviating the slower public sector spending in 2018 (+0.1% Y.o.Y) and 2019 (-0.9% Y.o.Y). The latter is in-tandem with the government’s ongoing fiscal consolidation efforts by reviewing, deferring or cancelling major infrastructure spending as well as lower capital outflows by public companies.

Private investment is also expected to grow in 2019 (+5.0% Y.o.Y) with capital outlays mainly into the services and manufacturing sectors following budget incentives to spur the adoption of Industry 4.0and lower corporate tax rates for companies with less than RM2.5 mln in paid-up capital.

The Pakatan Harapan-led maiden Budget will also see an increase of 10.7% Y.o.Y in the government’s total revenue to RM261.81 bln in 2019, from RM236.5 bln this year, largely due to a one-off special dividend of RM30.0 bln from Petronas, which will be used to settle outstanding tax refunds. Subsequently, the stronger revenue base will help cushion the increase in operating expenditure of RM259.9 bln (+10.4% Y.o.Y) in 2019, amid higher civil servants’ emolument and grants.

The government has revised its development expenditure allocation higher to RM54.9 bln (from RM46.0 bln allocated by the previous administration) in 2018, after accounting for additional costs arising from key infrastructure projects (i.e.: LRT3, electrified double-track projects, reclassification of development-related items from operating expenditure) However, the development expenditure is expected to normalise slightly to RM54.7 bln (-0.4% Y.o.Y) in 2019.

Still a major revenue contributor, total tax revenue collection is expected to reach RM176.2 bln (from RM174.7 bln), making up about 67.3% of the estimated total revenue in 2019, although it’s contribution to the GDP is seen to fall slightly to 11.5% next year, from 12.2% in 2018, on the back of lower petroleum-related income tax collection amid a more modest assumption of crude oil prices.

The inflation rate is expected to quicken to 2.5%-3.5% in 2019, from 1.5%-2.5% in 2018, mainly due to inflated fuel prices and the depreciating Ringgit, although the impact will be slightly offset by a more targeted subsidy and social support for selected income groups. The government is planning to float RON95 fuel prices and provide subsidies of up to 20 sen per litre of fuel for single-car owners and motorcycles with the engine capacities below 1,500 cc and 125 cc respectively. The selective subsidies, however, will be capped to 100 litres per month for cars and 40 litres per month for motorcycles. Other government aids include Living Aid Assistance (or BR1M previously) cash handouts and subsidies to minimise the price differences of critical goods (i.e.: rice, wheat flour and sugar) in urban and rural areas.

S&P Global Ratings has expressed its concerns on the increase reliance in the volatile commoditybased revenues, which leads to a higher risk to Malaysia’s fiscal health in the absence of more structural revenue-raising measures. This comes on expectations of a wider fiscal deficit of 3.7% in 2018, compared to 2.8% estimated previously. However, the ratings agency remains positive on the government’s fiscal reform initiatives and concurred that the one-off pressures such as the GST refunds should moderate after 2019.

To recoup the lower tax collection after the abolishment of Goods and Services Tax (GST), Budget 2019 saw the introduction of two new taxes, namely tax on imported services and soda. The service tax will be imposed on imported services in order to ensure local service providers such as architecture, graphic design, Information Technologies (IT) and engineering design services remain competitive and also part of the initiative is to tackle the brain drain problem faced by Malaysia over the past few years. In addition, online services including software, music and video download, coupled with digital advertising are required to be registered with the Royal Malaysian Custom to reduce the disadvantage faced by physical retail stores vs. virtual storefronts operated by foreign entities.Meanwhile, the introduction of a soda tax on sugar sweetened beverages at RM0.40 per litre aims to address the issue of which two-third of Malaysians are categorised as overweight or obese.

The gaming industry has not seen revisions in taxes, fees and levies since 2005 as the previous budgets were focused on other sin sectors - tobacco and alcohol. Budget 2019 saw the announcement several increases, comprising of the increase in casino license fee by RM30 mln to RM150 mln per annum, duties on casino will increase up to 35.0% of gross collection, machine dealer’s license will jump from RM10,000 to RM50,000 per annum and gaming machine duties will increase to 30% (from 20%) on gross collection. There will also be fewer number of special draw days for Numbers Forecast Operators.

In an effort to support the already high cost of living, B40 households will continue to receive cash grants. All in, a total of 4.1 mln households will continue to receive financial assistance under Budget 2019 totalling RM5.0 bln. Apart from that, the Government has introduced the B40 Health Protection Fund to provide free protection against top four critical illness of up to RM8,000 and up to 14 days of hospitalisation income cover at RM50 per day. The move that will be funded by Great Eastern Life Insurance with an initial seed funding of RM2.0 bln and it bodes well for the masses as it ensures social welfare protection coverage for the middle and lower-income groups.

The issue on home ownership affordability has been on the table over the years for both B40 and M40 groups. Budget 2019 re-iterated the support for the construction and completion of affordable homes with an allocation of approximately RM1.5 bln for Program Perumahan Rakyat, Perumahan Penjawat Awam Malaysia, PR1MA and Syarikat Perumahan Nasional Bhd. Although there is ample supply of affordable homes, financial institutions continue to step on their brakes on lending activities. Consequently, Bank Negara has allocated RM1.0 bln under Budget 2019 to assist first homebuyers to purchase affordable homes priced up to RM150,000 with a concessionary financing rate as low as only 3.5% p.a. First time home buyers will also receive an exemption on stamp duty for properties priced between RM300,000 and RM1.0 mln for a period of six months starting 1st January 2019. Under the various measures undertaken over the years, overall household debt to GDP moderated slightly to 83.8% as at end-June 2018 (from 84.2% in December 2017).

The education sector was awarded the largest allocation of RM60.2 bln, representing 19.1% of the total government spending. This includes RM2.9 bln for food, text books and cash assistance for students from lower income groups, while a total of RM652 mln will be allocated to upgrade schools. In the meanwhile, the Government will continue to provide scholarships and lending to all Malaysians via the various Ministries and Agencies with a total allocation of RM3.8 bln, of which RM2.0 bln is allocated to provide scholarship for Bumiputeras under the sponsorship of MARA. In view of the high National Higher Education Loan Fund (PTPTN) defaulters, the Government plan to introduce progressive loan repayment schedule with a percentage ranging from 2%-15% of the borrowers’ monthly income, depending on their income level.

Small medium enterprise (SMEs) that accounts to 98.5% of business in Malaysia, will be boosted by a wide range of goodies with 500 SMEs to be assisted by the Government to carry out the Readiness Assessment to migrate to Industry 4.0 platforms via Malaysia Productivity Corporation. A notable move was the reduction of corporate income tax on taxable income of up to RM500,000 and SMEs with less than RM2.5 mln in paid-up capital, will be reduced to 17% (from 18%). Several financingschemes were also allocated, such as a RM4.5 bln SME Loan Fund, RM1.0 bln SME Syariah Compliant Financing Scheme and RM200.0 mln under Permodalan Usahawan Malaysia Berhad to empower the growth of SMEs.

The long overdue implementation of the B10 biodiesel (mixture of 10% esters methyl palm oil and 90% diesel) program for the transportation sector and B7 for the industrial sector will kick off 2019 in order to drive the demand for palm oil and increase the sustainability of energy resources. In the meantime, the Government will allocate RM30.0 mln to assist smallholders to obtain the Malaysian Sustainable Palm Oil (MSPO) certification to raise the sustainability and export competitiveness. The aforementioned implementation could boost crude palm oil (CPO) prices by reducing the inventory level that is stood its highest level in eight months in September 2018.

Source: Mplus Research - 5 Nov 2018