SUMMARY

● The revised Budget 2023 remains moderately expansionary. It aims to tackle the high debt burden, corruption, and economic challenges such as elevated living costs and low foreign investment, with provisions to address market disruptions and business simplification. It broadly promotes social responsibility, fiscal accountability, and transparency.

● The government is projecting GDP growth of 4.5% in 2023 compared to a forecast range of 4.0% - 5.0% by the previous administration. This is lower than the house forecast of 4.7% but higher than the median consensus of 4.0%.

● Total gross expenditure has been expanded to RM386.1b, with an additional RM2.0b allocated for contingency, higher than the previous administration allocation but slightly below the previous year’s record high estimated expenditures (2022E: RM395.2b). Overall, the government’s fiscal stance remains expansionary, reflecting the government’s continued support to the economy.

● Gross development expenditure is expected to increase by a sharp 35.5% to a record high of RM97.0b (2022F: RM71.6b) due to the increased allocation of funds towards economic development projects. Conversely, operating expenditure is expected to decrease slightly, primarily because of the reduced allocation of subsidies and social assistance, as well as the completion of the COVID-19 fund.

● In line with the government’s commitment towards strengthening fiscal position and higher GDP growth projection, the MoF expects the fiscal deficit to narrow to 5.0% in 2023 (2022E: 5.6%) from the previously forecast of 5.5% of GDP. Given the latest budget revision, we have revised our 2023 fiscal deficit forecast slightly to 5.0% from 4.9% previously.

● On the revenue front, the federal government is projected to enhance its fiscal position through an increase in tax revenue. These include the due collection of the one-off Prosperity Tax that was introduced in 2022, an increase in SST collection, the introduction of new taxes and an emphasis on achieving higher tax compliance.

● Debt is expected to remain elevated but will likely stay within manageable levels and under the 65.0% statutory debt limit, which has been extended for 2023. Debt service charges rose in 2022 and may do so in 2023 on greater government borrowings backed by improved overall debt affordability as government revenue picks up.

● Please see the appendices for the full list of budget measures and key highlights. ‘

Overview

● On Feb 24, the retabling of Malaysia’s 2023 Budget marked Prime Minister Datuk Seri Anwar Ibrahim’s maiden budget as premier, and after 26 years since he last tabled the budget as Finance Minister during the Asian Financial Crisis. Themed "Membangun Malaysia Madani (Developing a Civil Malaysia)", the revised Budget 2023 maintains a moderately expansionary stance, with the revised allocation increased to RM386.1b, greater than the initial budget of RM372.3b proposed by the previous government in October 2022. The original budget could not be passed before parliament was dissolved to make way for the 15th General Election, which ultimately brought the Unity government into power.

● The Prime Minister highlighted the importance of tackling Malaysia's high debt burden, systemic corruption and fiscal leakages, as well as safeguarding the country amid an uncertain global economic climate. The budget also prioritizes addressing the issue of high living costs, bolstering social welfare, weak foreign investment, and tackling other economic challenges such as high inflation, unemployment, and low average youth income. Additionally, the budget includes provisions to alleviate market disruptions and simplify business procedures by adopting advanced technology and digitalization.

● The revised Budget 2023 explores the Madani Malaysia Development framework, with 12 main strategies based on three broad objectives:

- Comprehensive and sustainable economic growth: To promote economic progress that is fiscally sustainable and meets pressing economic needs such eradicating poverty, repairing infrastructure, and increasing national income through targeted subsidies or taxation structures. There is also focus on efforts to better prepare for disasters, as well as promote green practices and high-impact investments.

- Institutional and governance reforms to restore confidence: The measures aim to combat corruption, improve infrastructure, promote economic growth, investment and job creation, prioritize the digital agenda and invest in innovative start-ups. Additionally, efforts will be made to improve the quality of life for the poorest people and preserve national heritage.

- Social justice to reduce inequality: To combat poverty and improve living conditions by bringing in institutional reforms, public-private cooperation, and investments in digital infrastructure. Funds will also be allocated for poverty alleviation programs, to promote unity and celebrate diversity, and provide quality basic needs such as transportation and education.

● We commend the revised Budget 2023 as a comprehensive effort to tackle the country’s pressing economic challenges whilst promoting greater social responsibility, as well as fiscal accountability and transparency. That said, while the government has emphasized the need to reduce Malaysia's high debt burden, we reckon there will be challenges to reach the lower deficit target of 3.2% of GDP by 2025 given the delicate and highly uncertain economic environment post-pandemic. Nonetheless, we welcome the proposed presentation of the Fiscal Responsibility Bill later this year and think it reflects a commitment towards ensuring long-term stability alongside sustained economic growth.

MoF’s Growth Outlook

● The Ministry of Finance (MoF) forecasts Malaysia’s economic growth to grow by 4.5% in 2023 (2022: 8.7%) compared to the 4.0% - 5.0% forecast range by the previous administration. This is slightly below our forecast of 4.7% but above Bloomberg’s consensus median of 4.0% (range: 2.1% - 5.0%)

- Sectoral: Growth moderation is still expected in 2023, with the exception of the agriculture and construction sectors. The services sector is projected to moderate to 5.3% (2022: 10.9%) but slightly higher than the 5.0% announced by the previous administration. Growth is expected to be supported by domestic demand and buoyed by consumer-related sub-sectors. The manufacturing sector is expected to moderate to 3.9% (2022: 8.1%) but to remain supported by an expansion in all subsectors led by the E&E segment and domestic-oriented industries. In addition, the mining and quarrying sector is expected to moderate by 1.2% (2022: 3.4%), albeit slightly higher than the previous administration forecast. This is driven by the completion of new pipeline projects in Sarawak and rising demand from major trading partners as well as from the domestic industrial and petrochemical segment. However, the construction sector is expected to expand sharply by 6.1% (2022: 5.0%), higher than the previous forecast of 4.7%, amid improvement in all subsectors due to the implementation of new projects such as upgrading the Klang Valley Double Track (KVDT) Phase 2 and acceleration of ongoing major projects such as LRT3, ECRL, and 5G infrastructure development. Besides, greater demand for non-residential and residential buildings are expected alongside a higher supply of affordable houses as part of the 12th Malaysia Plan. Similarly, the agriculture sector is projected to expand by 1.1% (2022: 0.1%), albeit lower than the previous administration’s projection of 2.3%. Growth is associated with the improvement in palm oil, livestock and fishing subsectors.

- Domestic demand: It is projected to expand by 5.4% (2022: 9.2%), slightly higher than the earlier forecast (5.1%) amid continued improvement in the labour market, and robust economic and social activities following the reopening of China’s economy and border. Private consumption is projected to increase by 6.1% (2022: 11.3%), albeit moderately, due to the diminishing pent-up demand and the lag effect from the increase in the BNM’s Overnight Policy Rate (OPR). Nonetheless, growth will be supported by continued cash transfer programmes such as Sumbangan Tunai Ramah cash aid and special financial assistance to civil servants and government pensioners. On the investment front, various measures and efforts to enhance good governance, reduce the cost of doing business and facilitate faster investment approvals, as well as to improve competitiveness and investment ecosystem, will sustain growth in private investment by 5.8% (2022: 7.2%). Meanwhile, the public sector is expected to complement the private sector via higher public investment (7.0%; 2022: 5.3%) due to the continuation and resumption of major projects such as LRT3, ECRL, RTS Link and the upgrading of KVDT Phase 2.

- External Sector: Gross exports are now projected to slow sharply to 1.6% (2022: 25.0%) from 2.2% anticipated by the previous administration. The slowdown is attributable to subdued external demand on the back of geopolitical instability and the expextation of a relatively lower global commodity prices. The projection is also in line with the increase in the export of manufactured products particularly from the continuous demand for both electrical and electronics (E&E) and non-E&E products. In comparison, we are projecting 5.8% export growth, contributed largely by the positive effect of China’s reopening. Nevertheless, the government upgraded its gross imports projection to 1.1% (2022: 31.3%) from 0.2% anticipated earlier, attributable to high demand for intermediate, capital and consumption goods in line with improved domestic demand and investment activities.

Source: Kenanga Research - 25 Feb 2023