Posted Date: November 05, 2020

Given the importance of preserving lives and livelihoods, as well as stabilising the economy, Budget 2021 will be expansionary. We think the government's unprecedented fiscal response in 2020 is justified; if not for the swiftness and scale of the response, the outcome from the intertwined public health and economic crisis could have been more devastating.

We expect higher allocations in absolute ringgit terms for both development expenditure (DE) and operating expenditure (OPEX) in 2021. As a percentage of GDP, however, they should come in lower at 4.0% and 18.7% given the recovery from negative GDP growth in 2020. The budget balance should also moderate to between -5.5% and -5.0% of GDP, thanks to, again, the economic recovery, as well as to some extent the fact that fiscal policy had already done most of the heavy lifting in 2020. Meanwhile, debt should come in at between 55.0% and 58.0% of GDP.

Struggling small and medium enterprises (SMEs) could see wage subsidies extended, and digital adoption grants increased and extended. There could also be allocations for rental subsidies, as well as tax waivers to help keep SMEs afloat.

There will be a higher sense of urgency to reduce leakages and improve tax collection. In support of some of these efforts, we expect more allocations to strengthen enforcement agencies. For example, there will likely be stronger crackdowns on illegal economic activities.

To care for the rakyat, social assistance benefitting B40 and M40 households will likely be extended. To protect their jobs, wage subsidies could be extended again. Meanwhile, we do not expect sustainable development efforts to slow amid the pandemic. This is because the outcome of these efforts will put us in a better position to recover from the human and economic toll of the pandemic.

To ensure that the rakyat can share the full benefits of the recovery and move to more innovative and productive livelihoods going forward, investment in human capital is essential. As such, we envisage incentives to the private sector to provide internships, training and upskilling.

We expect the domestic economy to expand by between 6.2% and 6.7% in 2021 primarily because of the low base effect (2020 forecast: -5.5% to -7.0%). Our forecast assumes that there is continued government support, the current third wave of infections is contained by December 2020 and that further outbreaks in 2021, if any, will be small and short in duration. We expect further movement restriction orders will be highly localised and sporadic instead of it being deployed at the nationwide level.

Private consumption will remain as a growth driver in 2021 with its contribution to headline growth rising to around 60% (1H2020: 42%). We expect its growth pace to improve to between 5.3% and 5.7% (1H2020: -6.0%) due to the low base effect and supportive budgetary measures.

Meanwhile, CPI inflation will likely rebound in 2021 – with some help from slightly recovering global crude oil prices – to between 1.3% and 2.3% from a forecasted range of between -0.5% and -1.5% this year.