Published on 06 Nov 2020.
The supportive stance of Budget 2021 is appropriate and broadly in line with RAM’s expectations, given the fragility of the near-term economic outlook. RAM views that a steady economic recovery, supported by targeted short-term fiscal measures and effective public health measures will underscore sustainable long-term fiscal prospects.
The Government’s 6.5%-7.5% growth projection for 2021 (2020 estimate: 4.5% contraction) is in line with our current growth projections. The economic recovery will be driven by private consumption stemming from a gradual recovery of the labour market and various stimulus measures to support income across all segments. These measures include direct transfers (RM6.5bil), income tax adjustments, optional withdrawals from EPF Account 1 (RM4 bil) and a lower rate of EPF contributions by employees (RM9.3bil). We also anticipate a moderate recovery in private investment and exports amid the slew of investment initiatives to boost the business landscape.
In addition, we envisage a significant boost in public investment next year, driven by the sizeable RM69 bil allocation for development expenditure (2020: RM50 bil). The bulk of this will be channelled to the transport, health and education sectors, which are critical to boost economic recovery. Notably, the enlarged budget for public health should lead to better outcomes in the fight against the pandemic.
On the fiscal front, the projected budget deficit of 5.4% of GDP in 2021 is within our expectations and tolerance levels, given the pressing need to fuel economic recovery. Assuming no further supplementary budget next year, government debt is envisaged to stay hefty at circa 61.4% of GDP in 2021. Given petroleum-related earnings account for 16.0% of Malaysia’ total revenue, fiscal metrics remain highly sensitive to oil price volatility as well as the pace of global economic recovery and developments on the coronavirus front.
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