PREVIEW-Malaysia’s Najib faces budget test amid oil slump and graft scandal

Dogged by scandal and hampered by falling oil and gas revenues, Malaysia‘s Prime Minister Najib Razak will present a budget on Friday that will look to shore up economic growth and appease voters unhappy with his leadership and rising living costs.

It is unlikely to alter investors’ disillusion with Najib’s Malaysia, reflected by the ringgit currency’s 20 percent drop since the start of the year to levels unseen since the Asian financial crisis in the late 1990s.

While the government would like to show it is business as usual, passage of the budget could test the support Najib commands in the ruling United Malays National Organisation (UMNO) as he fends off corruption allegations over indebted state-fund 1Malaysia Development Bhd (1MDB).

Najib, who is also the finance minister, prepared the ground for a voter-pleasing budget in a blog post last week, saying a state survey found cost of living, housing and education were the most important issues for Malaysians.

“Preservation of household income is important. That is why I am stressing on the people’s economy,” Najib wrote.

Self-preservation is also likely to figure in the equation, analysts say. Opposition lawmakers are pushing this week for a confidence vote in parliament, which Najib would almost certainly survive if it did happen.

But he still needs to convince worried UMNO members that he can come through the multi-billion dollar scandal at 1MDB to lead them into an election due by 2018.

A poll by Merdeka Center, published by the Singapore Straits Times on Saturday, showed support for the government among the country’s ethnic Malay majority had sunk to 31 percent in August from the 52 percent in January. Support among the minorities, notably the Chinese, was even lower.

Making it harder for Najib, Malaysia‘s economy is showing signs of slowing after growing 5.3 percent annually in the first half of 2015 and low prices for exports of oil, gas and other commodities have reduced its external surpluses.

While wanting to boost growth and employment, Najib can ill-afford to take risks fiscally, or politically after the introduction of a highly unpopular sales tax on goods and services in April.

HANDOUTS, BONUSES AND NEW ROADS

Singapore-based Nomura economist Brian Tan foresaw no major budget surprises this time.

“There would just be more cash handouts and infrastructure projects,” Tan said. “The more he tries to change, the more is the risk of taking unpopular decisions, which the government wants to avoid.”

The budget is likely to include measures to cushion the impact of new taxes, hikes in road tolls and subsidy cuts on households through cash payouts, bonus payments for civil servants and individual tax relief.

Economists foresee subsidies increasing through a cash handout programme for the poor called BR1M. Affordable housing programmes could be expedited also.

Other likely measures include more spending on road building, particularly in the politically key Borneo states of Sabah and Sarawak.

The government is already struggling to bring its fiscal deficit down to a targeted 3.2 percent of gross domestic product this year.

Unhelpfully, the dividend received from state oil and gas firm Petronas is expected to be far lower than the committed 26 billion ringgit ($6.18 billion) for 2015.

On the plus side, the new sales tax has raised a more than expected 23.2 billion ringgit since its introduction, deputy finance minister Chua Tee Yong told parliament on Monday.

Despite ringgit’s slump, international credit rating agencies have kept Malaysia‘s sovereign debt at investment grade and all of them have a “stable” outlook for the rating. But room for stimulus remains limited.

“The government has to consider the trade off between maintaining fiscal consolidation mentioned in the new five-year plan and maintaining near term support for this economy,” said Christian de Guzman, Moody’s analyst, referring to the 11th Malaysia Plan unveiled in May.

 

What to watch for – Malaysia‘s 2016 budget

 

PROGRESS ON 1MDB’S INVESTIGATION

Maybank Investment Bank Research among the items that may be raised by the government is its commitment to resolve issues related to 1Malaysia Development Berhad (1MDB) by year-end, resuming a parliamentary inquiry and monetisation of 1MDB’s power assets and landbanks to pare down debts.

CASH AIDS

BR1M, a programme to hand out cash assistance to households earning less than 4,000 ringgit ($951.25) a month and individuals earning less than 2,000 ringgit, would see an increase of 100 to 200 ringgit, said AmResearch. The expansion in BR1M will likely cost the government 5.6 billion ringgit in 2015, up from 4.9 billion ringgit last year.

HIGHER MINIMUM WAGE

The minimum wage may be raised, with the possibility of a single national minimum wage as opposed to current different levels for peninsula Malaysia and East Malaysia, said Maybank.

GST COLLECTIONS

Revenue collected from Goods and Services Tax expected to be higher than official estimate, helping to offset stubbornly high operating expenditure, said Kenanga, a Malaysian investment bank.

CORPORATE TAX CUT

If the increase in tax collections from GST allows it, a corporate tax cut of one percentage point to a standard rate of 23 percent could be announced for 2017, Kenanga said.

DISPOSABLE INCOME BOOST

Measures to increase private consumption possible via income tax relief or a temporary reduction in employee EPF contributions, Kenanga said.

INFRASTRUCTURE SPENDING

Infrastructure spending would likely focus on rural areas, with plans for highway and railway construction, expansion of fibre optic cables and development of electricity and clean water supply, said MIDF Research.

The government would continue its commitment to high-impact public sector infrastructure and investment projects involving the federal government, government-linked companies and investment funds, said Maybank. The bank highlighted several key projects in the transport sector, the oil and gas project in Pengerang, Johor and development of government land for projects such as the Tun Razak Exchange in Kuala Lumpur.

In transportation, the government is likely to reinterate its commitment to the development of city rail projects and more bus rapid transit projects, said RHB Bank.

RELIANCE ON GLCs

Government may rely heavily on government-linked companies to spearhead the economy via investments and new projects that are financed off-budget, said RHB Bank.

AGRICULTURAL SECTOR BOOST

To improve self sufficiency, the government is expected to introduce measures for the agricultural sector, with investment incentives to focus on agro-business to increase domestic food production, said Maybank and MIDF Research.

SMALL MEDIUM ENTERPRISES(SMEs) TO GET MORE HELP

Funding for the Domestic Investment Strategic Fund, a fund to help some Malaysia-owned companies compete in high value-added industries, said AffinHwang Capital.

REDUCTIONS IN OPERATIONAL EXPENDITURE

Cost cuts likely for public services, enanga said.

PROGRAMMES TO RAISE PRODUCTIVITY

Government spending likely to focus on human capital development via education and training, said RHB Bank, AffinHwang and MIDF Research.

Incentives for the private sector to invest in productivity are expected, along with measures to address unemployment, RHB Bank said.

SUPPORT FOR INDUSTRY

The Federation of Malaysian Manufacturers is asking the government to extend the reinvestment allowance, strictly enforce the “buy made-in-Malaysia” policy for government procurements and implement trade facilitation measures to help promote export competitiveness and expansion, local media reports.

TRANSPORTATION SUBSIDY

Subsidies may be introduced for low and middle income earners using public transport, said MIDF Research.

AFFORDABLE HOUSING

Government is expected to speed up affordable housing projects for low and middle income groups, said RHB Bank. The bank also expects requirements for affordable housing be loosened by increasing the household income ceiling and reducing minimum holding period from 10 years to 5 years.

($1 = 4.2100 ringgit) (Reporting By Trinna Leong; Editing by Simon Cameron-Moore)

Reuters

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.