Economic Update

Promising to initiate methods to stimulate domestic economic activity and foreign direct investment (FDI), Prime Minister Najib Abdul Razak unveiled his government’s proposed 2012 budget on October 7.

The draft budget puts a spotlight on public and private investments and expects that increases in FDI and projects under the 10th Malaysia Plan (10MP) will increase private and public investment by 15.9% and 7%, respectively.

With FDI reaching RM29bn ($9.3bn) in 2010, Najib told parliament that he expected investment to expand in 2012. “In the first half of 2011, [FDI] surged further by 75% to RM21.2bn ($6.8bn) compared with RM12.1bn ($3.9bn) for the same period in 2010,” he said. “Private investment is expected to expand by 15.9% in 2012, supported by the increase in foreign and domestic direct investments.”

Malaysia’s economic fundamentals remain strong, despite the global slowdown. The country’s banking and financial system’s 14.8% risk-weighted capital ratio is almost double the international requirement of 8%, and its international reserves were strong as of mid-September, at RM414.5bn ($132.4bn), an amount sufficient to finance 4.5 times its short-term external debt and 9.5 months of retained imports.

Indeed, the budget is based on an estimate of 5-6% economic growth in 2012, a calculation supported by a 7.1% projected increase in private consumption, a 6.5% expansion in the services sector and a 7% rise in the construction sector.

The RM232.8bn ($74.4bn) budget, which is likely to be approved by parliament, would spend 1.4% more in 2012 than its expenditure of RM229.56bn ($73.4bn) in 2011. Total revenue in 2012 is expected to increase 1.9% to RM186.9bn ($59.8bn) next year, compared with RM183.4bn ($58.6bn) this year. The federal deficit in 2012 is expected to shrink to 4.7% of GDP compared with 5.4% in 2011.

The draft budget would fund all of the country’s numerous development plans, with operating expenditures accounting for RM181.6bn ($58.1bn) of the total and development expenditure for RM51.2bn ($16.3bn).

This funding would extend to a new plan – called the Second Rolling Plan (RP2) – under the 10MP to be implemented in 2012. The RP2, allocated RM98.4bn ($31.5bn), will focus on high-impact development projects such as the Gemas-Johor Bahru double-tracking rail project and the Sungai Besi Kuala Lumpur Air Base redevelopment.

In addition, the government proposes to liberalise services subsectors in 2012, allowing up to 100% foreign equity participation in selected areas. As the largest contributor to the nation’s economy – accounting for almost 58% of GDP – the services sector is targeted to contribute 60% of GDP by 2015 under the 10MP. To meet this goal, next year will see a phased liberalisation of 17 services subsectors, from medicine to law, education and telecommunications.

The country’s financial services sector also received special attention in the budget. The prime minister announced the establishment of the Treasury Management Centre, which will aid the country’s development as a regional financial centre, encouraging multinational corporations to establish their treasury management services in Malaysia. The government also proposed incentives such as income, withholding and stamp duty tax exemptions to sweeten the deal.

For the Islamic financial industry, incentives such as tax deductions and income tax exemptions were extended to encourage continued sukuk (Islamic bond) issuances. A concessionary 10% tax rate on dividends of investors in real estate investment trusts was also extended.

To further spur domestic growth, a stimulus package will be implemented through a private financing initiative. In 2012, the package will see the implementation of projects amounting to RM6bn ($1.9bn) to upgrade and maintain hospitals, schools and basic rural infrastructure. It will also be used to mitigate flood risks and construct public houses.

At a time of global uncertainty, and with increasing discussion over elections that must be called within the next 18 months, the prime minister was careful to ensure that the budget offered all Malaysians something to feel hopeful about.

Indeed, in a nod to concerns over rising living costs and an increasing gap in incomes, proposed cash hand-outs to the country’s 1.3m civil servants included a bonus equal to half their monthly salary, and a one-time payment of RM500 ($160) to low-income families.

In comments to the local media in response to the budget, CIMB Group’s group chief executive, Nazir Razak, called it “a creative and responsible budget, bringing down the deficit to 4.7% in 2012 and yet delivering benefits to the most deserving segments of the [citizenry]”.

Provided parliament passes the budget much as it stands in its draft form, both foreign investors and local citizens should have something from which to benefit.

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