Budget deficit may widen

Research house sees slower economic growth of 4.5% next year

PETALING JAYA: Malaysia’s budget deficit may widen to 3% of gross domestic product (GDP) in 2019, amid an expected slower economic growth of 4.5% next year, cautions Alliance DBS Research.

The research house said although the government is on track to achieve its budget deficit target of 2.8% this year, it pointed out that the deficit level could potentially rise back to 3% due to several financial constraints that the government needed to address next year.

For fiscal year 2019, AllianceDBS Research projected the federal government’s revenue at RM228bil, down 5.1% year-on-year (y-o-y). On the other hand, total expenditure is expected to be RM273bil, representing a reduction of 4.9% y-o-y.

“This will result in the 2019 fiscal deficit increasing to 3% of total GDP, in the view of its commitment to repay the shortfall in the goods and services tax (GST) refunds of RM19.3bil and unpaid refunds in personal income taxes and corporate taxes worth RM16bil.

“Given that Malaysia’s budget has been in deficit since 1998, it is imperative for the government to spend prudently and wisely in order to meet its target of attaining a balanced budget by 2023, the year that the World Bank forecasts Malaysia to achieve high-income nation status,” it said in a note.

On Budget 2019, AllianceDBS Research said it would likely be “a more contractionary budget with lower public spending and a focus on fiscal consolidation”.

It also added that the country’s falling tax revenue may further restrict public spending in 2019.

However, the research house pointed out that oil-related revenue could rise in the coming years, given the higher Brent crude oil price in recent times.

“Higher oil-related revenue collection could mitigate the impact of the loss in GST revenue collections from the abolition of the GST this year. This is in view of rising crude oil prices globally, which is averaging at a year-to-date price of US$73.1 per barrel.

“Based on our estimates, an increase of US$1 per barrel in the Brent crude oil price would result in an additional oil revenue of RM300mil.

“Therefore, the government is likely to collect an additional oil-related revenue of around RM6.3bil (on top of the previous forecast),” it said.

As for the corporate income tax, it is anticipated to remain as one of the main contributors to the national coffers.

Meanwhile, in response to the federal government’s participation in the private sector, AllianceDBS Research has recommended the government to gradually divest Khazanah Nasional Bhd’s equity ownership in government-linked companies (GLCs).

The research house said that Khazanah’s equity holding in GLCs currently amounted to RM77.4bil.

“We reckon that through proper guidance and evaluation, the government could gradually divest the equity holdings of Khazanah in GLCs by 20%-30% (RM16bilRM24bil) to other government-linked investment companies such as the Employees Provident Fund,” it said.

The brokerage said another option is for the government to divest Khazanah’s stakes to private or strategic investors.

“This is because the reduction in government holdings to the private sector would mitigate the crowding-out effect by the government.

“It will also encourage private participation in the local equity market, allowing the private sector to potentially drive the market forward with lesser intervention and control,” it added.

Higher oil-related revenue collection could mitigate the impact of the loss in GST revenue collections from the abolition of the GST this year. AllianceDBS Research