• Malaysian government will switch to a new public service compensation scheme

• 7-15% salary hike starting this December 2024

• Guaranteed incremental rates positive for domestic consumption

• Malaysia’s GDP to rise by 0.6% following RM10bn fiscal injection

Malaysian government will switch to a new public service compensation scheme from 1st December 2024 that will see broad pay hikes and salary restructuring for the country’s 1.6 million civil servants. The revamped Public Service Remuneration System (SSPA) will replace the former scheme. The implementation of the SSPA is based on three reforms: improving productivity and efficiency in the public service, increasing the readiness of civil servants to implement changes, and enhancing the country’s competitiveness.

7-15% salary hike starting this December 2024. Mid-level civil servant professionals will receive a 15%, while top civil servants will get 7% increase. The salary increments will be implemented in phases in December 2024 and December 2025. For those with 15%, the first phase will receive 8% and another 7% in the second phase. The salary adjustments are expected to cost the government about RM10bn a year, with further details to be announced in the Budget 2025.

Paving the way for further fiscal reforms. With additional OPEX on emoluments, we believe this situation will lead to gradual implementation of targeted-RON95 fuel subsidy. Reduce subsidy spending is the best option now as reintroduction of GST is not on the table. Also, volatility of global commodity prices remains as downside risks to oil-related revenue and fiscal policy especially with current intensifying geopolitical tensions.

Guaranteed incremental rates positive for domestic consumption. Long-term (2010- 2022) average of nominal median wage growth is 4.1% while headline inflation rate is 2.0%. With guaranteed incremental rates for two years, this will improve consumer sentiment and boost domestic consumption in 4Q24 onwards. However, spike of domestic inflation remains as downside risk which may affect real wage value and erode purchasing power.

Malaysia’s GDP to rise by 0.6% following RM10bn fiscal injection. Based on our inhouse economic model, the expected-RM10bn fiscal injection will generate 0.6% growth to overall economy especially compensation of employees to rise by 1.1%. This is assuming other parameters remain constant. Other income components such as taxes will improve by 0.1% whereas subsidies and imported commodities up by similar momentum.

Services sector to gain the most. Apart from government services, health and education, the fiscal injection is predicted to expand sectoral output of motor vehicles, other financial services, and pharmaceuticals products. Also, food & beverage which ranked-22 out of 122 to grow by 0.2% and real estate (Rank 28) up by 0.2%. We opine the salary-hike for civil servants is impactful due to the public workforce size and guaranteed income growth at least for the next two years. Civil servants’ workforce roughly 1.6 million, it is approximately 10.1% of Malaysia’s total employment.

Source: BIMB Securities Research - 19 Aug 2024