Malaysia’s government on Friday (Oct 11) unveiled a smaller budget for next year as revenue is expected to fall, but said it would hike development spending to offset a slowdown in global demand.
As expected, the government also said it would run a larger fiscal deficit of 3.2 per cent of gross domestic product (GDP) – compared with an initial target of 3 per cent but lower than this year’s 3.4 per cent – to help spur economic activity.
Southeast Asia’s third-largest economy bucked a global cooling trend and grew faster than expected in the first half of 2019, but analysts say the US-China trade war and expanding protectionist policies around the world will eventually drag on the export-reliant country.
The government, nevertheless, forecast economic growth of 4.8 per cent next year, slightly higher than this year’s projection of 4.7 per cent, and pencilled in a very modest improvement in exports.
“Domestic demand will anchor growth with the external sector expanding moderately against the backdrop of a challenging global environment,” the government said in its Economic Outlook report, released along with the second budget of Prime Minister Mahathir Mohamad’s ruling coalition.
Revenue is forecast at RM244.53 billion in 2020, down 7.1 per cent from this year’s projection. Unlike this year, there will be no repeat of a RM30 billion one-off payout to the government by state energy firm Petronas.
The government’s operating budget will drop sharply to RM241.02 billion next year from RM262.26 billion allocated for this year.
But development spending will expand to RM56 billion from RM53.7 billion in 2019, to fund the government’s plan to boost economic activity, invest in education and training, and “revitalise public institutions and public finances”.
Analysts had expected the government to unveil an expanded budget overall, but it is grappling with a RM1 trillion debt pile left behind by its predecessors, limiting its room to manoeuvre.
In an accompanying fiscal outlook report, the government said it would also set aside an additional RM3 billion to speed up ongoing major infrastructure projects.
Finance Minister Lim Guan Eng had flagged it would be a “challenge” to meet its earlier deficit target for 2020, due to uncertainties tied to the protracted Sino-US trade war.
MODEST GROWTH OUTLOOK
The government said the economy is expected to growth in the range of 4.5 per cent to 5.0 per cent over 2020-2022. Domestic demand is expected to rise 4 per cent this year with the pace accelerating to 4.8 per cent next year, supported by a stable labour market and low prices.
Inflation is seen at 2 per cent in 2020, up from a projected 0.9 per cent this year, as the government introduces a targeted fuel subsidy plan.
The government expects private sector activity to continue to prop up the economy. The services sector, which accounts for about 58 per cent of GDP, is forecast to grow 6.1 per cent in 2019 and 6.2 per cent next year.
The government also expects a quicker pace of expansion in manufacturing and construction in 2020, though it sees mining sector growth moderating. Agriculture is seen growing at a slower pace of 3.4 per cent in 2020 compared to 4.3 per cent this year.
Policymakers expect petroleum-related revenue to fall 1.4 per cent to RM50.5 billion in 2020, based on an assumed average global crude oil price of US$62 per barrel.
Gross exports are estimated to expand by 0.1 per cent in 2019 and 1.0 per cent the following year.
The current account surplus is likely to widen to RM43.4 billion in 2019 on an increase in net exports of goods and services. However, projected weakness in global and domestic demand and commodity prices are expected to slash that figure to RM29 billion in 2020.
The government said monetary policy has been “accommodative and supportive of growth amid stable prices” in 2019, and expects it to continue to support economic growth and ensure price stability.
“Moving forward, Malaysia’s resilient economy is likely to support the movement of the ringgit amid a challenging global outlook,” it said.