Malaysia presents smaller budget for 2020, widens fiscal deficit target

[KUALA LUMPUR] Malaysia's government on Friday unveiled a smaller budget for next year but flagged a wider fiscal deficit than previously targeted and proposed new incentives to support growth and attract foreign investment as the US-China trade war drags on.

Southeast Asia's third-largest economy bucked a global cooling trend and grew faster than expected in the first half of 2019, but analysts say the trade dispute and expanding protectionist policies around the world will eventually drag on the export-reliant country.

The government, nevertheless, forecast economic growth of 4.8 per cent next year, slightly higher than this year's projection of 4.7 per cent, and pencilled in a very modest improvement in exports.

To help spur activity, it projected a fiscal deficit of 3.2 per cent of gross domestic product (GDP), larger than an initial target of 3 per cent but lower than this year's 3.4 per cent. 

The government is also considering tax exemptions for the country's massive electrical and electronics industry to encourage investment, Finance Minister Lim Guan Eng said in his budget speech in parliament, as it looks to attract companies which are moving operations from China due to the escalating tariff battle.

New incentives for foreign investment will be finalised by Jan 1, and the government will also prepare steps to encourage special investments of up to 1 billion ringgit (S$327.8 million) every year for five years.

"Domestic demand will anchor growth with the external sector expanding moderately against the backdrop of a challenging global environment," the government said in its Economic Outlook report, released along with the second budget of Prime Minister Mahathir Mohamad's ruling coalition.

The government budgeted 297.02 billion ringgit  in spending for 2020, 6 per cent lower than the 316 billion ringgit earmarked for this year.

Analysts had expected the government to unveil an expanded budget overall, but it is grappling with a 1 trillion ringgit debt pile left behind by its predecessors and declining revenue.

Revenue is forecast at 244.53 billion ringgit in 2020, down 7.1 per cent from this year's projection. Unlike this year, there will be no repeat of a 30 billion ringgit one-off payout to the government by state energy firm Petronas.

However, Mr Lim ruled out reintroducing a goods and services tax (GST) that was repealed last year.

The government's operating budget will drop sharply to 241.02 billion ringgit next year from 262.26 billion ringgit allocated for this year.

But development spending will expand to 56 billion ringgit from 53.7 billion ringgit in 2019, to fund the government's plan to boost economic activity, invest in education and training, and "revitalise public institutions and public finances".

In an accompanying fiscal outlook report, the government said it would also set aside an additional 3 billion ringgit to speed up ongoing major infrastructure projects.

Mr Lim had said it would be a "challenge" to meet its earlier deficit target for 2020.

The government said the economy is expected to growth in the range of 4.5 per cent to 5.0 per cent over 2020-2022.

Domestic demand is expected to rise 4 per cent this year and 4.8 per cent next year, supported by a stable labour market and low prices.

The government expects private sector activity to continue to prop up the economy. The services sector, which accounts for about 58 per cent of GDP, is forecast to grow 6.1 per cent in 2019 and 6.2 per cent next year.

Policymakers expect petroleum-related revenue to fall 1.4 per cent to 50.5 billion ringgit in 2020, based on an assumed average global crude oil price of US$62 per barrel.

Gross exports are estimated to expand by 0.1 per cent in 2019 and 1.0 per cent the following year.

The current account surplus is likely to widen to 43.4 billion ringgit in 2019 on an increase in net exports of goods and services. However, projected weakness in global and domestic demand and commodity prices are expected to slash that figure to 29 billion ringgit in 2020.

The government said it expected monetary policy would continue to be "accomodative and supportive of growth".

REUTERS