Govt giving more focus to equitable, sustainable growth

THE review of the 11th Malaysia Plan (11MP) is the first policy paper of the Pakatan Harapan government that sees more focus being placed on equitable and sustainable growth rather than chasing headline numbers.

The broad-based approach to future growth, which sees more emphasis on reforms, also highlights the short-term pain that is going to be experienced to fix the gaping holes in public finance that was revealed after the change in government on May 9.

That was punctuated by the higher fiscal deficit the country will need to endure, with the budget deficit widening to 3% by 2020.

“Our base-case scenario projects the budget deficit to widen to -3.7% of gross domestic product (GDP) in 2018F and -3.5% of GDP in 2019F, due to the recognition of large, one-off goods and services tax (GST) and income tax refunds totalling RM34bil, before moderating to the 11MP mid-term review target of -3.0% of GDP in 2020,” says CIMB Investment Bank in a note.

“In our view, the temporary deviation is necessary to repair government finances and should not be mistaken as a sign of profligacy. In fact, if the tax refunds were excluded, our estimates suggest that the government would have run a marginal current surplus in 2019F and a budget deficit of -3.2% of GDP in 2018F and -2.5% of GDP in 2019F.”

Explanation on the widening deficit will be needed for the markets to ensure rating agencies and investors have a clearer understanding of why the deficit is going up. The message of a gradually sliding deficit gives comfort to the ringgit and news of a higher budget deficit can affect the direction of the local currency. The ringgit weakened slightly to RM4.16 to the US dollar yesterday.

The early message, though, is clear as the higher deficit is not about just spending more. The change from the GST to the sales and service tax has created a funding gap of RM23bil, which will be plugged through cuts in spending, and also by higher dividends from government-linked companies and the sale of stakes in companies it owns and land.

CIMB says that the government has room to make fiscal adjustments via spending cuts without hurting growth prospects unduly if wastages and leakages are curbed.

“We think operating and development expenditures can by trimmed by RM7bil in Budget 2019 due to tighter procurement procedures, zero-based budgeting, reviews or deferment of infrastructure projects, more targeted subsidies and cash transfers, and revisions in supply and services con- tracts, which could limit the need for aggressive revenue-raising measures and steeper cuts to productive areas of spending,” it says.

The takeaway analysts had on the 11MP review is that its growth target of between 4.5% and 5.5% until 2020 is realistic and the emphasis is on making economic growth sustainable and equitable.

Maybank Investment Bank feels that the new element in government focus is its commitment towards reforms of the public service to improve its governance, integrity, accountability, transparency and efficiency, as well as prudent management of public finances.

“Otherwise, the 11MP MTR’s six policy pillars and the original 11MP’s six strategic thrusts contain similar emphases, which are essentially economic growth that is inclusive, equitable and sustainable by focusing on people’s wellbeing; an equitable society; human capital; balanced regional development; and “green growth”,” it says.

It says that the review hits home as its looks at reforms of Parliament, the public service, the labour market and public finance. There is also the narrowing of income disparity and more focus on SMEs and a new national Industry 4.0 Policy Framework that will see the private sector drive growth for the economy.

“The government has recalibrated its 11MP macroeconomic targets due to the need to reform amid the urgency to strengthen fundamentals. Breathing space provided by the 11MP review should be used as an opportunity to reflect on reality under changing circumstances and capitalised on to overhaul the economy,” says Public Investment Bank in its note.

“This is imperative, as the assumptions made previously may no longer be conducive in the present time. It is also crucial to ensure our economy remains vibrant and broad-based.”

It says that reform, recalibration and an overhaul of the economy with the objective of making Malaysia attain quality and sustainable growth amid a new economic backdrop and changing dynamics are necessary.

“It is also imperative to take stock of the headwinds ahead, some possibly prolonged in nature with hugely negative repercussions, notably the protectionist measures and inward-looking policies. Ensuing volatility in capital and currency markets due to advanced nations’ policy moves pose additional risks. Geopolitical uncertainty is another potential flashpoint that cannot be ignored, a potential blowup leading to capital termination which is inadvertently risky to the real economy,” says the investment bank.