Published on 23 Oct 2023.
The recently tabled Budget 2024 focuses on improving the country’s fiscal deficit without jeopardizing economic growth in the near term. While we would have liked to see bolder reforms, the baby steps to rein in government expenditures are understandable, given the coalescence of downside risks on both domestic and global fronts. Thus, supporting growth, via the still-high development expenditure (DevEx) allocation, remains a major focus heading into 2024. We expect more material changes in the medium term as the need to pay special heed to stimulate economic growth subsides.
En route to narrowing the deficit
The Malaysian government remains committed to fiscal consolidation with the fiscal deficit expected to improve to 4.3% of GDP by end-2024 (2023e: 5.0%) and ultimately reach the targeted 3.0%-3.5% by end-2025. This estimated reduction in the deficit ratio in 2024 is not solely due to the larger nominal GDP denominator but also through a smaller fiscal deficit of RM85.4 bil (2023e: RM93.2 bil) achieved via subsidy rationalisation and effective taming of the rise in operating expenditure (OpEx). The growth in OpEX allocation for 2024 was relatively modest at 1.2%, milder than the 1.5% projected for revenue. This is forecasted to widen the government’s current balance to RM3.8 bil in 2024 (2023e: RM3.1 bil), the largest since 2010, if achieved.
Figure 1: Fiscal deficit projected to continue to narrow
Sources: Ministry of Finance, Ministry of Economy, RAM
Note: 2023e and 2024f figures are Budget 2024 estimates. 2025f figures are 12MP Mid-term Review projections.
Double-pronged effort – raising revenue and trimming expenditures
The commitment to reduce the fiscal deficit is augmented by several revenue-raising measures; the most visible being the raising of the service tax rate to 8% from the current 6%, with some exemptions. The scope of the service tax will also be expanded to include services such as logistics, brokerage, underwriting, and karaoke. Other tax accretion measures include the capital gains tax (for unlisted shares at 10%) and luxury goods tax (at 5%-10%). Inherently, the additional revenues from these narrow tax avenues are relatively small, with the hike in service tax expected to raise just RM3 bil in 2024. For comparison, the allocation for Sumbangan Tunai Rahmah (cash aid for the B40) has been increased by RM2 bil to RM10 bil in 2024, partially offsetting the negative economic impact of the service tax hike. Clearly, the government’s priority is to avoid a broad and swift dampener to consumption, the main engine of growth in Malaysia.
The higher tax collection is also complemented by the baby steps in the rationalisation of subsidies, including the removal of chicken and egg subsidies, the lifting of electricity subsidies for heavy electricity users and the targeting of diesel subsidies. These are estimated to generate savings totalling circa RM11.5 bil per year. Subsequently, the subsidies bill is projected to fall to approximately RM32 bil under Budget 2024, from around RM41 bil in 2023.
Notably, the rationalisation of RON95 subsidies has been omitted from this budget despite much presaging. Its delay may shield Malaysia from any potential inflation spike next year, considering the upside risk to global oil prices amid the recent conflict in the Middle East. Based on our estimates, assuming that the RON95 price is freely floated, every USD5/barrel movement in crude oil prices will alter headline inflation by approximately 0.4 percentage points, barring any second-round effects on prices. That said, we cannot fully rule out the implementation of RON95 targeted subsidies in 2H 2024. The government’s wide inflation forecast range of 2.1%-3.6% seems to suggest that the timing, mechanism and magnitude of this much-needed rationalisation remain on the cards.
Still an expansionary budget
Despite the attempt at narrowing the fiscal deficit, Budget 2024 remains an expansionary budget, which we opine is a prudent strategy given the weak economic prospects next year. Firstly, while the gross DevEx next year will be smaller (RM90 bil) than this year (RM97 bil), it remains a large allocation by historical standards (2015-2019 average: RM46.2 bil). To note, DevEx in 2023 was also bumped up by the allocation for the redemption of the USD3 bil 1Malaysia Development Berhad (1MDB) bonds. At 4.5% of GDP, the DevEx allocation for 2024 is also higher than the average of 3.4% between 2015 and 2019. The elevated allocation is critical to drive and sustain many of the moonshot targets of the New Industrial Masterplan 2030, the New Energy Transition Roadmap and the nation’s net-zero fulfilment.
Figure 2: Effective DevEx allocation remains high
Sources: Ministry of Finance, RAM
Note: 2023 and 2024 figures are Budget 2024 estimates.
Bolder reforms inevitable in the medium to long-term
A stark reality for Malaysia’s finances is the comparatively low revenue base. As a share of GDP, government revenue has been steadily declining; forecasted at about 15.6% in 2024, from 20% in 2014. This compares poorly against the global average of around 24% and the average upper-middle-income economies of about 20%. To arrest and reverse this, Malaysia needs to institute bolder tax reforms to broaden its tax base; a consumption tax is by far the most effective remedy. Understandably, the government is carefully calibrating its approach to the consumption tax given previous less-optimal experience.
Figure 3: Malaysian government revenue below peers’
Source: World Bank
Additionally, the government should actively trim its growing debt servicing burden, which has been steadily rising over the years. The government projects debt service charge to remain elevated at 16.2% of revenue in 2024 (2015-2019 average: 12.4%). In the present lofty global interest rate environment, it will not only be substantially more costly to raise new debts but also to refinance maturing debts, leading to a heavier debt servicing burden in the future. Admittedly, some of the debts were incurred to finance Covid-19 pandemic related support measures, which will take time to wind down especially when growth is also moderating.
It is never easy for a developing economy with ambitious growth plans to avoid budget deficits in the medium term. All said, we are heartened that this government is cognizant of the financial discipline and the motivations needed to strike a good balance between fiscal sustainability and economic growth.
Figure 4: Key government forecasts and MTFF targets
Sources: Ministry of Finance, US Energy Information Administration, RAM
Note: 2023e and 2024f figures are Budget 2024 estimates.
MTFF = Medium-Term Fiscal Framework
Woon Khai Jhek, CFA
(603) 3385 2512
(603) 3385 2595
(603) 3385 2500
About RAM Rating Services Berhad (RAM Ratings)
Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Credit Rating Agencies. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains.
ALL INFORMATION IS PROVIDED “AS IS” WITHOUT WARRANTY OF ANY KIND. Although every reasonable care has been taken to ensure the accuracy, completeness and objectivity of the information contained in this Media Release, RAM Ratings makes no representation or warranty, whether express or implied, as to its accuracy, completeness and objectivity and accept no responsibility or liability relating to any losses or damages howsoever suffered by any person arising from any reliance on the views expressed or information in this Media Release. RAM Ratings assumes no obligation to update any information or statement contained herein, save for any information required to be disclosed by law.
Published by RAM Rating Services Berhad
© Copyright 2023 by RAM Rating Services Berhad
All rights reserved. This material may not be published, reproduced, broadcast, rewritten or redistributed without prior permission.