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LAST Friday, the Finance Minister tabled what is now known as Malaysia’s largest-ever budget.

The excellently-crafted and well-written budget was presented in a couple of hours and after it was presented, the social media, mainstream media, economists, consulting firms and investment banking strategists gave their views on the measures, especially those related to taxes, incentives or grants.

Now that Budget 2021 has been tabled, lawmakers will debate on the merits and vote on it. Having covered budgets for more than two decades, the devil is in the details and this year is not an exception.

Let’s look at the gross domestic product (GDP) estimate first. The government expects GDP growth for 2020 to contract by 4.5% and for next year, it is estimated to grow by between 6.5% and 7.5% in real terms. For the economy to close the year with the projected contraction, the second half of 2020 has a very small room to contract by only 0.7% as the economy shrank 8.3% in the first half.

This is a tall order as economic data remains largely weak as seen in several indicators, which include the industrial production index as well as the poor reading in the retail sub-segment.

With almost the entire nation under the conditional movement control order, economic growth, if any, will be challenging.

Meanwhile, in nominal terms, the government expects GDP growth to be -4.7% this year and to rise significantly by almost 9% in 2021, as inflation is expected to return with a reading of 2.5%, mainly due to the low base effect from 2020.

Perhaps when the Bank Negara releases the third quarter GDP data on Friday, we can then assess if the full year GDP assumption still holds water or otherwise.

For 2021, the government expects GDP growth to be driven by domestic demand, in particular growth from private consumption while the external sector may post some drag as imports are forecast to grow even faster than exports.

On the supply side, the government expects the services and manufacturing sectors, which account for 80% of the economy, to grow by 7% each while construction is expected to bounce back with a near 14% leap in 2021 after the forecast drop of 18.7% this year. From here, we can observe that one of the key drivers of the economy next year is public investment, as the government has bumped up development expenditure to the tune of RM69bil for 2021 from the adjusted figure of RM50bil this year (which was previously forecast to be at RM56bil).

The government’s total expenditure is now broken into three main buckets – other than operating expenditure and development expenditure, we now have a new line item called the Covid-19 Fund with an allocation of RM38bil this year and RM17bil next year.

In essence, since the pandemic outbreak, the government has introduced various economic stimulus packages under its Prihatin package series and the Penjana package, which in total amounted to RM305bil, while the actual direct fiscal injection totaled RM55bil.

However, under the Temporary Measures for Government Financing (Coronavirus Disease 2019) Act, the Parliament had only approved a ceiling of RM45bil for the fund and hence the Minister has proposed, taking into consideration the nation’s need up to 2022, an amendment that will be tabled to raise the fund to RM65bil, an increase of RM20bil.

This increase that was mentioned in the budget speech is meant for the RM10bil Kita Prihatin package, additional assistance for people’s well-being, as well as to secure the supply of the much-needed vaccine. The table above summarises the government’s revenue projection for this year and the next.

The expected revenue for the second half of the year and into 2021 will be challenging for the government, given the level it had achieved in the first half. As it is, the second half forecast is 23.3% higher than the first half.

In addition, for 2021, revenue and expenditure are expected to increase by 4.2% and 4.3% respectively, which will likely be tough given the tax breaks that the government is proposing, in particular, company income tax (CITA) and personal direct taxes.

Based on government’s estimate, taxes from the two sources are expected to fall by 6.8% and 7.2% this year but will bounce back strongly in 2021 with a growth of 8.8% and 18.2% respectively.Interestingly, the 2021 forecast for CITA and personal direct taxes at RM64.6bil and RM42.4bil is higher than 2019’s figure by 1.3% and 9.7% respectively.

As for expenditure, as total federal government debt stood at RM874.3bil mark or 60.7% of GDP as at end of September 2020, the government’s Debt Service Charges (DSC) too have deteriorated.

From an estimated level of 15.4% of GDP this year, DSC is expected to drop further to 16.5% in 2021, mainly driven by 11.6% increase in absolute DSC to RM39bil.

Although both the DSC ratio in 2020 and 2021 will be higher than the self-imposed fiscal limit ratio of 15%, it is hoped that by beyond 2021, this ratio will be brought under control when the economy is expected to expand further.

All in, Budget 2021 measures are holistic and inclusive for all levels of society and have been cleverly crafted to address the challenges faced by Malaysians, especially those severely impacted by Covid-19.The government has largely listened to the voices of hope in addressing the pandemic world.

Having said that, the expected government’s revenue and GDP projections are rather optimistic, resulting in a much lower budget deficit figure while the forecast government tax revenues too are on the high side. While the DSC has now surpassed the self-imposed ceiling, the government’s debt to GDP ratio is expected to remain elevated for at least this year and in 2021.It is important for the lawmakers to approve this budget as the government has taken steps in keeping the economy going.

While there are some shortcomings in the terms of budget allocations, it is hoped that this can be ironed out during the parliamentary debate stage and all lawmakers come to an consensus to approve the gigantic budget.

Pankaj C. Kumar is a long-time investment analyst. Views expressed here are his own. 

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The FM really got SHOCKED when LGE asked him whether the budget was approved by the cabinet. Watch the video.

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The economy continues to chug along just fine even as it recorded the first inflation of the year in March. The consumer price index (CPI) rose 0.2% in March 2019 from the previous year.

The recovery away from a deflation in the previous two months was driven by the transport and the food & non-alcoholic beverages components of the CPI.

MIDF Research said in its report that the country's consumer inflation is likely to stay low following the lower capped prices of RON95 and Diesel at RM2.08 and RM2.18 per litre respectively.

Nevertheless, it said that the demand-push factor remains firm amid stable job market and steady wage growth.

Meanwhile, labour force growth has maintained at 2.1% year-on-year (yoy) in Feb 2019 while employment growth inched down to 2.1% yoy while jobs added in the economy was recorded at 34,000.

It noted that the number of unemployed people officially increased by 1.6% yoy.

But it noted also that growth in both the labour force and employment continued to outpace unemployment growth for the last 24 months since Mar 2017.

"The stable job market reflects healthy development of Malaysia’s economy and provides solid support to domestic demand," the research house said.

Meanwhile, exports dropped 5.3% yoy in Feb 2019, the lowest in more than two years mainly due to a short calendar month on top of the long Chinese New Year (CNY) holidays.

Imports also fell and it declined more than exports at 9.4% yoy.

During the CNY holidays, all Chinese factories were shut down with most of them closed one or two weeks prior to the festive holidays. As the celebration put a halt to mass production, it disrupted the global supply chain resulting in a weak trade performance.

All sectors recorded a negative exports growth: agriculture (-13.7% yoy), manufacturing (-4.3% yoy) and mining (-5.5% yoy).

Despite the poor exports and imports figures, trade surplus maintained at above RM11bil in Feb 2019.

When compared with the previous month, both exports and imports contracted by 22% and 24.8% 
respectively.


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Chinese economy expands 6.9% in 2015, slowest growth in 25 years

Video: http://t.cn/R4QD2R0China’s economy posted a 6.9 percent GDP growth in 2015, which is within people’s expectations. Faced with suspicions, the National Bureau of Statistics (NBS) emphasized that the figure – 6.9 percent – is real.

On the one hand, with an increasing number of “struggling” companies, the economic downturn has become a heated subject of public opinion. On the other hand, other fields, for instance, tourism, railways and online shopping, are seeing robust growth. So, taken together with the affirmation by the NBS, we can have confidence in the accuracy of the figure.

It is safe to say that people still have much confidence in the economy. Despite an economic downturn, people’s willingness to spend is witnessing an upward trend. Consumption is contributing more to GDP growth. Compared with some pessimistic comments, an increase in consumption can better reflect public confidence. In addition, citizens’ plans for their families and their futures are positive as a whole. Admittedly, the loss of confidence in the stock market has exerted negative effects. Society has varying degrees of confidence in the economy.

The 6.9-percent increase in GDP will not strike a blow to the confidence of Chinese society. Even if the figure were slightly lower, there is still a lot to sustain people’s confidence. In fact, different from Western society, politics carries some weight in how confident Chinese people feel.

There are a number of factors contributing to the public’s confidence in the economy. First of all, people believe in the government. As long as the government’s determination and confidence to develop the economy can be seen, the public will be reassured. The government has made many commitments regarding economic development and people's living standards. It is becoming increasingly honest about the difficulties as well. The government’s backbone is not weakening. Yet, there is increasing dissatisfaction with the laziness of some officials. This new phenomenon is worth paying attention to.

The Chinese people are confident about the country’s market potentials. They know that the country lags behind in many aspects and that great efforts are needed. People tend to believe that it will be an arduous task to narrow the gap of people’s livelihood between China and developed countries. Despite the long road ahead, few people believe the process will break down.

Since the Communist Party of China launched the anti-graft drive and pushed forward reforms, many people expected the country to make greater achievements. But China is in a full-fledged transitional period. Its 1.4 billion population is to China’s advantage.

Complaints can be heard in China, and many concerns are well grounded. Some people try to seek a sense of security by applying for a foreign green card and transferring their assets overseas. But China’s status as the world’s biggest emerging market and potential for opportunities is as significant as ever.

China has plenty of tasks. Many cities still lag behind in basic infrastructure. Many roads need to be rebuilt. The key for change is economic growth. In addition, medical care cannot meet public demand. Many parents have sent their children abroad due to the low quality of education. The Chinese people’s concept of consumption is changing fundamentally and people long for improved living standards. These will all serve as a robust foundation for sustainable economic growth.

There should not be any fear that the 6.9 percent growth will upset Chinese society. The Chinese people will remain confident. The government needs to achieve concrete results and need not rush to adjust its policies. Many problems will be solved as long as China is on the right path. - Global Times

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US key interest rate unchanged as global economy worries

U.S. Federal Reserve Chair Janet Yellen attends a press conference in Washington D.C., the United States, Sept. 17, 2015. The Federal Reserve announced on Thursday that the federal funds rate will stay unchanged considering the weak global economy and low inflation. (Xinhua/Yin Bogu)

WASHINGTON, Sept. 17 (Xinhua) -- The U.S. Federal Reserve on Thursday kept its benchmark interest rate unchanged, saying the rising uncertainty abroad and low inflation were the key reasons behind the decision.

After concluding a two-day monetary policy meeting, the Fed said in a statement that the economic activity is expanding at moderate rate with labor market approaching maximum employment but inflation staying muted.

However, in light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the Fed judged it appropriate to wait for more evidence, including some further improvement in the labor market to bolster its confidence that inflation will rise to 2 percent in the medium term, Fed chairwoman Janet Yellen said at the press conference on Thursday.

In regard to foreign developments, the central bank is paying more attention to the developments in China and emerging economies, according to Yellen.

China's economy is growing at a slower pace as it rebalances its economy, which has no surprise, said Yellen, but adding that developments in financial markets in August, in part, reflected concerns that there was down-side risk to Chinese economic performance.

In addition, the substantial downward pressures on oil prices and commodity markets have significant negative impact on resources-exporting emerging markets and advanced economies. Important emerging markets have seen significant outflows of capital, pressures on their exchange rates and concerns about their future performance.

Besides the rising uncertainty in emerging markets, the low inflation is one of the reasons holding the Fed back in raising interest rates.

The core personal consumption expenditure (PCE) price index, an inflation gauge preferred by the Fed, only went up 1.2 percent year on year in July, far below the central bank's 2 percent. The index has been below the Fed's target for over three years.

The recent drop in oil prices and the further appreciation of U.S. dollar have put some downward pressure in the near-term on inflation, which means that it will take a bit more time for these transitory effects to fully dissipate, said Yellen.

According to the Fed officials economic projections released on Thursday, they expected the core PCE price index won't meet the Fed's target until 2018, while the unemployment rate will drop to 4.8 percent, below 4.9 percent, the level the Fed considered as full employment.

Yellen said that as the labor market heals, there will be further upward pressure on inflation. But She said the process is slow and is characterized by lags, and that is why it takes a few years as the inflation to get back to 2 percent, while the unemployment rate falls and even overshoots its longer-run normal level.

The Fed still leaves door open to a rate hike sometime this year. Most Fed officials still expect a first rate increase this year, Yellen said, noting that 13 out of the 17 Federal Reserve Board members and Federal Reserve Bank presidents are looking for a move in 2015.

The Federal Open Market Committee, the monetary policy decision body, will hold two policy meetings this year, in October and December. According to Yellen, every meeting has possibility for a rate increase.

Yellen reiterated that market should pay less attention to the timing of the first interest rate increase and more attention to the expected path of rates.

"The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate," said Yellen.

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