Posted Date : 24 Oct 2009

The measures in Budget 2010 are intended to delicately balance the need to address the government’s budgetary constraints while continuing to support the nascent economic recovery. The series of measures unveiled yesterday are focused on reducing the budget deficit by trimming operating expenditures and broadening the revenue base through the re-introduction of several taxes. Consequently, the budget deficit as a percentage of gross domestic product (GDP) is expected to shrink dramatically to 5.6% in 2010 from an estimated 7.4% in 2009.

The efforts to address the budget deficit have been undertaken in view of the persistent negative gap in the past 11 years and the expectation that oil-related revenue will slowly decline in the medium term following weaker oil prices after reaching its peak in July 2008.  Moreover, efforts to generate non-oil revenue such as a possible introduction of goods and services tax (GST) will take time to be fully realized.  As a result, the government has announced aggressive cuts in operating expenditure and re-introduced selected taxes such as on disposal of real property as well as services tax on credit and charge cards. Among the sectors that may be negatively affected are the property sector due to the introduction of a fixed-rate tax on property sale, and the banking sector (with the exception of the Islamic banking sector), given the lack of tax incentives.

Although the thrust of Budget 2010 is on reducing the budget gap, MARC reiterates its view that the budget deficit is not the only factor that can lead to long-term macro imbalances.  The action taken to trim the budget deficit should be balanced with measures to nurse the nascent economic recovery, while at the same time avoid further increasing government debt. Malaysia’s bond market is also an important factor in the country’s budgetary issues from a financing perspective.   MARC is of the opinion that there should not be undue concern over the possibility of a downgrade in sovereign ratings as the sheer size and vibrancy of Malaysia's bond market does not reflect any weakness in Malaysia’s macro foundation.

Apart from dealing with the budget deficit, Budget 2010 appear to be centered on facilitating access to finance for small businesses, subsidies for the agricultural sector and promoting foreign direct investment in certain sectors (as opposed to short-term pump priming). Visibly lacking are the "shot in the arm” measures. There is certainly a strong social welfare component which will address issues on the quality of human capital and long-term competitiveness.  The lack of generous short-term stimulants and aggressive public spending should ensure that Budget 2010 will be perceived as 'neutral' from a rating implication perspective.

As for the capital market, the government's extension of tax incentives for the Islamic banking and takaful sectors to 2015 will help Malaysia maintain its attractiveness as Asia's leading Islamic financial centre. As Islamic finance has been identified as one of several areas that will facilitate Malaysia's successful transition to a high-income economy, continuing with the incentives makes intuitive sense.  FDI in the Islamic banking and takaful sectors have been substantial in recent years and are expected to maintain an important role in sustaining FDI inflows into Malaysia. The stamp duty exemption of 20% on Islamic financing instruments and double deduction on expenditure incurred in promoting Malaysia as an international Islamic financial centre will support the origination of Islamic financial instruments and the development of new Islamic financial product offerings.

To bolster the equity market, the government has proposed measures to encourage flexible brokerage sharing between stockbrokers and remisiers and to make the dividend payment process more efficient. Meanwhile, the measures to liberalise foreign equity participation in corporate finance and financial planning companies should contribute to an overall strengthening of the business potential and growth prospects of the companies.  However, MARC believes that it would have been ideal if the equity market-focused measures in Budget 2010 had been accompanied by measures to promote bond market activity, in particular, secondary trading.

MARC also welcomes measures to boost disposable incomes such as a 1% reduction in the income tax rate for the income group exceeding RM100,000 as well as an increase in personal tax relief by RM1,000 to RM9,000.  However, MARC feels that gains from these measures will likely be offset by the lower petrol subsidies, the re-introduction of service charges on credit and charge cards, as well as the tax on disposal of real property.

Overall, MARC feels that the projection for GDP growth between 2% to 3% in 2010 reflects the government’s cautious stance with regards to the possibility of a double-dip scenario in the global economy.  While MARC is slightly more optimistic in its projection for next year’s growth, anticipating a 3.6% expansion, it foresees a bumpier ride towards a fully sustainable recovery, partly due to the relatively stretched household balance sheets and a much weaker economic performance of developed countries, particularly the United States, following a dramatic decline in household wealth.  More critical, in MARC’s view, is the long-term growth profile, which largely hinges on private investment prospects.  As Malaysia needs to avoid seeing its average growth slip after recovering from this crisis, the measures that have been proposed in Budget 2010 are intended to strengthen the foundation of the economy in line with the country’s goal of becoming an innovative and a high-income nation. 

Contacts : 
Nor Zahidi Alias 03-2090 2277/ zahidi@marc.com.my; 
Milly Leong 03-2090 2288/ milly@marc.com.my