Government Revenue Will Still Outpace That of Operating Expenditure

Malaysia’s Finance Minister YB Lim Guan Eng released an official statement yesterday regarding the country’s current fiscal position, focusing on the measures in rationalising Federal Government expenditure as well as optimising revenue. He guided that the country’s fiscal deficit will increase by RM0.3bn to RM40.1bn from RM39.8bn for 2018, where the Government is confident to achieve the fiscal deficit target of 2.8% of GDP for 2018, even after the zero-rating of GST from 6% to 0%, effective from 1st June 2018.

Ministry of Finance (MOF) explained that the number of measures, such as reallocation of expenditure priorities, will likely make up for some revenue loss from GST. The Government projected that the zero-rating of GST will cost a lower revenue but by re-introducing the Sales and Services Tax (SST) on 1 September 2018, roughly RM17bn will be channelled back to the consumer after the offset. There are other measures to support consumer spending, such as the petrol price stabilization program, which will cost the Government RM3bn for this year. Additionally, the latest Hari Raya Special assistance program will cost the Government approximately RM700m. These three measures will cost the Government close to RM20.7bn, where the Government aims to boost consumer spending to improve consumer optimism and business profits.

The fiscal deficit target of 2.8% of GDP can be achieved as the Government is currently expecting a higher revenue, amongst others, the RM5.4bn from higher oil prices and another RM5bn from higher dividend by Government Linked Companies (GLCs) such as Khazanah, Bank Negara Malaysia (BNM) and Petronas. The Government highlighted that based on the assumption of an average global oil price of US$70 per barrel, from the US$52 per barrel used in the Budget 2018, oil revenue will increase by close to RM5.4bn. [Based on the assumption, every US$1 per barrel increase in the price of global crude oil will likely translate into a gain of about RM300m in Federal Government’s revenue.] As for higher dividend from GLCs, we believe around RM3bn to RM4bn will likely come from higher Petronas dividend, which is estimated to increase from RM19bn in the 2018 Budget to about RM22bn to RM23bn for this year.

We believe the projected budget deficit of -2.8% of GDP for 2018 can be achieved, but there is some downside risk that country’s budgetary position could get slightly larger, assuming if, due to possible shortfall in tax revenue receipts, especially from direct taxes, with the external environment remaining uncertain. However, with the government revenue still outpacing that of operating expenditure to register a substantial operating surplus in 2018, we believe the risk of Malaysia’s sovereign rating being downgraded is small, as international rating agencies are likely to consider government's further efforts to bring down fiscal deficit.

To further balance the fiscal position, Government also announced that it will review, defer and renegotiate at least RM10bn worth of identified highpriced projects. These include i) projects awarded via direct negotiation or limited tender exercise, ii) non-essential operating expenditure, iii) certain big-ticket budget allocations for mega projects and iv) other expenditure items such as special projects, capital injections etc.

Source: Affin Hwang Research - 1 Jun 2018