Malaysia deficit forecast 'reasonable' but optimistic about growth: economists

MALAYSIA'S budgetary projections for 2021 rely on gross domestic product (GDP) growth estimates that are slightly above market expectations, said economists after the country's Budget 2021 was tabled on Nov 6.

The expansionary Budget, with an 8.5 per cent rise in expenditure, relies on a sharp economic recovery next year, said OCBC economist Wellian Wiranto in a Nov 9 note.

"Already, it is projecting growth of 6.5 to 7.5 per cent in 2021, above our baseline expectation of around 6 per cent," he said.

"If the economy fails to pick up speed as much as expected, the government will take in less and may yet have to spend more - pushing up the deficit and debt ratio up." Covid-related expenditures include direct cash aid and wage subsidies. When it comes to financing these, however, what stands out is "the sharp decline in dependence on oil", said Mr Wiranto.

The Petronas dividend payment is expected to be RM18 billion (S$5.9 billion) in 2021, nearly halving from RM34 billion this year.

The government's financing plan instead hinges upon a 13.8 per cent rise in tax revenue. Tax intake is expected to be just 3.4 per cent less than that of the pre-Covid era in 2019, "inherently presuming" that economic activities and hence tax income will resume to "a large degree of normalcy", noted Mr Wiranto.

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This would presumably have to be underpinned by a sharp V-shaped recovery -- which, if it does not materialise, would lead to a revenue shortfall here.

"All in all, even as the economic recovery has indeed been going relatively strongly... we are just a bit concerned that enough of the downside risks presented by the ongoing pandemic outbreak in Malaysia for instance may materialize to push growth down and affect the fiscal assumptions," he said.

While it is good to see a Budget that is expansionary and supportive of growth, "we would remain watchful of how the budget would require fairly strong growth outturn to finance itself to begin with", he concluded.

In a Nov 8 note, Citi economists Kit Wei Zheng and Ang Kai Wei similarly noted that the projected reduction of Malaysia's deficit to GDP ratio hinges heavily on an expected 2021 rebound, "with limited deficit reduction in absolute terms, and few revenue enhancements".

Still, they consider the fiscal deficit target of 5.4 per cent of GDP to be reasonable, saying: "Into 2021, small downside risks from GDP growth and non-oil revenues could be counterbalanced by upside risks to oil revenues, and possible underspending on ambitious development expenditure targets."

The government's growth assumptions of 04.5 per cent in 2020 and 7 per cent in 2021 are "slightly more optimistic" than Citi's -- with the main difference being 2020, as Citi's forecast is -5 per cent growth.

Downside risks that could lead 2020 growth towards the lower end of its forecast range, which is -5.5 per cent, have likely risen, said the Citi economists, noting the extension of the conditional movement order.