SUMMARY

• In its quest to rejuvenate economic prosperity and elevate living standards, the government has earmarked an unprecedented RM393.9b for the 2024 Federal Budget. This move underscores its unwavering commitment to fiscal reforms, as outlined in the "Ekonomi Madani" framework to ensure enduring fiscal resilience.

• The federal government pegs 2024's GDP growth at 4.0% to 5.0%, in line with our house forecast of 4.9% and Bloomberg's median consensus of 4.5%. Meanwhile, the Ministry of Finance has tempered its 2023 outlook, cutting it from 4.5% to 4.0% (KIBB Forecast: 3.5% - 4.0%).

• The MoF charts a modestly expansionary fiscal course, anticipating the fiscal deficit to shrink to -4.3% of GDP in 2024, down from a forecasted -5.0% in 2023. Even with the government's loftier revenue expectations and trimmed allocations for development expenditure (DE) and tightened operating expenditure (OE), we hold steady on our fiscal deficit forecast, ranging from -4.5% to -5.0% (2023F: -5.0% to -5.2%).

• To reinforce its fiscal coffers, the government is revealing a suite of measures: elevating the sales tax to 8.0% from 6.0%, ushering in the Capital Gains Tax (CGT), taxing high-value goods, widening the tax net, and tightening the screws on taxpayer compliance.

• The budget earmarked for OE has soared to a record RM303.8b, driven chiefly by heftier outlays for emoluments and debt service charges (DSC). Gross DE is pegged at RM90.0b, with focus on health, security, and transport. Although smaller than the RM97.0b for 2023, the DE allocation for 2024 are mainly planned for projects that can produce high multiplier impact, underscoring a commitment to achieve long-term sustainable economic growth.

• As alarm bells ring over escalating debt, Budget 2024 rolls out a medley of initiatives, laying a foundation for enduring fiscal resilience. It's a clarion call for judicious financial stewardship and shrewd resource allocation, all aimed at staunching wastage and leakage.

• DSC have increased in tandem with rising federal government debt level to a staggering RM46.1b (2022F: RM41.3b) or around half of DE. We expect federal government debt to reach 64.5% of GDP in 2024 (2023F: 63.9%) versus government forecast of 64.0%.

Overview

• Themed ‘Economic Reforms, Empowering the People' the 2024 Federal Budget - the second budget offering from an eleven-month-old unity government – charts a path towards national economic sustainability and prosperity. With goals spanning improved governance to corruption eradication and uplifting the standard of living, it also serves as the conduit for fresh policy blueprints namely the National Energy Transition Roadmap (NETR), New Industrial Masterplan 2030 (NIMP 2030), and the 12th Malaysia Plan Mid-term Review (12MP)

• The Budget 2024 supply bill is based on the ‘Ekonomi Madani’ framework with three main focus areas:
  
  − Good governance for service agility: Government pledge to give its full support to ensure the governance ecosystem to function effectively based on the values of efficiency, honesty, and transparency. This includes strengthening judicial and parliamentary institutions, digitising government services, boosting social resilience, guaranteeing fiscal sustainability, and improving the rule of law.
  
  − Restructuring of the economy to boost growth: Essentially to improve the business environment by providing a solid infrastructure, a sizable skill pool, an abundance of natural resources, as well as widespread technological adoption, digitalization, and innovation. It focusses on recognising the economic contributions made by small businesses or MSMEs by providing a wide range of activities and projects to increase their level of competitiveness by providing funding options and talent development initiatives.
  
  − Raising the people’s standard of living: Putting social assistance at the fore, the government's commitment leans into bolstering aid for society's most vulnerable. From refining cash transfers to enhancing retirement blueprints, the intent is clear: better protection and provision. It also focusses on improving social insurance by seeking ways to widen the coverage, ensuring Malaysians nestle into a comfortable retirement. Meanwhile, retraining and upskilling initiatives are set to bolster worker resilience during challenging times.

• While Budget 2024 offers commendable steps to shield the rakyat and the economy from global pressures, its tepid stance on subsidy tweaks and vague outlines - particularly on the proposed progressive wage policy and its ten-year, seventargets agenda - stir doubts about its aptitude to resolve the structural socio-economic issues.

• While the proposed new taxes might fall short of expanding the tax base and bolstering revenue, they hint at the government's measured approach to tax reforms. It seems the government is wary of overburdening the middle class (M40), especially given the economic slowdown, as it could curb consumer spending. Yet, we anticipate phased tax shifts and tailored subsidies as the economy finds its footing.

MoF’s Growth Outlook

• The MoF pegs Malaysia's 2024 growth at 4.0%-5.0% from about 4.0% this year, a tad below our expectations. Still, it aligns with our forecast of 4.9% and sits comfortably within Bloomberg's consensus of 4.5% (ranging from 3.0% to 5.0%)
  
  − Sectoral: Domestic growth is expected to be sustained in 2024 despite slowdown in the global economic outlook. On the supply side, domestic growth will be driven by the services and manufacturing sectors. The services sector is projected to expand to 5.6% (2023F: 5.5%), backed by a broad-based expansion across subsectors chiefly led by the wholesale and retail trade subsector, which is expected to grow by 5.6%. This is also supported by a strong recovery in the tourism industry amid a surge in tourist arrivals and resilient consumer spending. The manufacturing sector is expected to expand to 4.2% (2023F: 1.4%), underpinned by better performance in domestic and export-oriented sectors, particularly the E&E segment, amid a rebounding demand for technologically advanced products. The manufacturing sector will be supported by the implementation of government initiatives under the Chemical Industry Roadmap 2030, NETR, and NIMP 2030. In addition, the construction sector is expected to expand to 6.8% (2023F: 6.3%) on a broad-based expansion. This is primarily attributed to ongoing development projects and acceleration of projects under the 12MP as well as the implementation of NIMP2030, more affordable housing projects and a new solar power plant. Similarly, the agriculture sector is projected to expand to 1.2% (2023F: 0.6%) on the back of expansion in most subsectors, namely palm oil, livestock, and other agriculture. This premise on the anticipation that the El-Nino will have a minimal impact on palm oil output while labour conditions return to pre-pandemic level, as well as an effort to strengthen food security and modernisation in the agriculture sector. In addition, the mining and quarrying sector is expected to rebound by 2.7% (2023F: -0.8%), contributed by performance in natural gas, crude oil and condensate subsectors with anticipation from higher output from new and existing production facilities.
  
  − Domestic demand: Domestic demand is expected to expand to 5.3% in 2024 from 4.7% in 2023. This will be driven by private consumption which is expected to expand by 5.7% (2022F: 5.6%) due to continued improvement in the labour market and robust economic and social activities. Meanwhile, the public sector is expected to contribute via public consumption (2.6%; 2023F: 1.0%), driven by increased spending in supplies and services and effort to spend effectively and efficiently. In addition, the government expects favourable business sentiments and improved external demand to support private investment, which anticipated to grow by 5.4% (2023F: 4.3%). This is likely to benefit from the realisation of higher approved investment announced by MIDA, particularly in the E&E, transport equipment and ICT subsectors. Meanwhile, public investment will complement the private sector, expanding by 8.3% (2023F: 8.2%) driven by government DE, non-financial public corporations’ expenditure, the continuation of transport-related projects and acceleration of refurbishments of dilapidated schools and clinics in rural areas.
  
  − External Sector: The government expect gross exports to rebound by 5.1% (2023F: -7.8%) on a broad-based expansion driven by the recovery in global trade outlook, improved prospect of the commodity sector, and ratification of trade agreements such as Regional Comprehensive Economic Partnership (RCEP), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Exports of manufactured goods are projected to rebound by 5.5%, bolstered by higher demand for E&E and non-E&E products. Similarly, gross imports are expected to recover by 4.9% (2023F: -6.8%), attributable to higher demand for intermediate, capital and consumption goods. This is driven by expansion in the construction sector, favourable investment activities and acceleration in the implementation of government projects with high multiplier impact.

• Overall, the government projection on GDP growth is realistic and lower than we initially expected. Though our growth projection (2024F: 4.9%) is on the high side, near the upper end of the government forecast, our projection remains susceptible to downside risk, particularly the impact of the global economic slowdown brought by the effects of higher interest rate environment among advanced economies.

Source: Kenanga Research - 14 Oct 2023