You are here

Malaysia to present expanded Budget to ward off trade war, slow growth

BT_20191008_MSIA8_3914064.jpg
Kuala Lumpur abolished an unpopular consumption tax last year - this was among Dr Mahathir Mohamad's election pledges - but has had to make good the loss of revenue by introducing a sales and services tax, raising tax payouts from gambling and the sale of privately-owned properties, and by introducing new taxes on sugar consumption and airport use.

Kuala Lumpur

MALAYSIA'S government will likely present an expanded budget on Friday to temper a weak economic outlook, as it grapples with global recession fears, the protracted US-China trade war and a large debt pile left behind by its predecessors.

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

Prime Minister Mahathir Mohamad's government will at the least need to sustain its development spending to prop up domestic demand next year, economists have said, even as it continues to deal with RM1 trillion ringgit (S$329 billion) in debt that has been blamed on embattled former premier Najib Razak's administration.

sentifi.com

Market voices on:

RHB Investment Bank said in a note: "We think Budget 2020 will likely include a contingency plan to counter the effects of a slowdown from the US-China trade war - a so-called mini fiscal stimulus package."

The contingency fund, which the bank estimated could amount to RM3 billion, will be on top of an estimated RM55 billion that the government will likely set aside for its 2020 development budget, RHB said.

Dr Mahathir's government bucked expectations when it tabled an expanded budget in November last year, in a bid to boost revenue despite the slowing economy. It also set a higher fiscal deficit target over the next few years to make room for domestic spending while chipping away at its debt.

China and Malaysia resumed a massive "Belt and Road" rail project in July at a heavily discounted cost after a year-long suspension of the project by Dr Mahathir, who followed through an election pledge to renegotiate or cancel "unfair" Chinese mega-projects approved by his predecessor Najib.

An expanded budget for next year could mean a slower pace of fiscal consolidation than forecast by the government, though it is something that is to be expected with the soft outlook, Standard Chartered said.

In July, Finance Minister Lim Guan Eng said it would be difficult to meet the 3 per cent fiscal deficit target for 2020 due to uncertainties fanned by the US-China trade war.

The government had earlier announced a fiscal deficit target of 3.4 per cent in 2019 and 2.8 per cent by 2021, and 2 per cent over the medium term.

Standard Chartered, projecting the deficit to fall to around 3.2 per cent, said in a note: "Nevertheless, we do not expect this to raise rating concerns, given the challenging economic outlook, as long as the medium-term fiscal consolidation target is adhered to."

Maybank Investment Bank said that although the government has said that it will not introduce any new taxes in the 2020 Budget, it could expand the coverage of existing taxes to broaden its revenue base.

Dr Mahathir's government abolished an unpopular consumption tax last year as part of an election pledge, but offset the loss in revenue by reintroducing a sales and services tax (SST), raising tax payouts from gambling and the sale of privately-owned properties, and introducing new taxes on sugar consumption and airport use.

Maybank said: "The widening of SST is ongoing... this will continue further in Jan 1, 2020, with more imported online/digital consumer services being included.

"We also would not discount the possibility of broader sugar tax coverage - currently levied on canned and bottled drinks - to include coverage of powdered brews such as three-in-one coffee mixes and carbonated drinks sold at fast-food restaurants." REUTERS