Budgeting Malaysia


Economic News

22 Jul 2010
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Last week's parliamentary budget statement gave rise to a feast of analysis and discussion, as the government outlined its plans to boost growth and slash the public debt.

Prime Minister and Minister of Finance Abdullah Ahmed Badawi gave the statement, which was covered by local TV channels with real-time analysis and panels full of talking heads - before filling many column inches the next day in Malaysia's newspapers.

"The 2006 budget focuses on a number of specific measures to generate greater quality growth in the near term that can contribute towards laying a strong foundation for long-term, sustainable growth," the prime minister explained.

The government has pledged to boost economic activity after 2005's forecast GDP growth fell to 5%, well down from 2004's 7.1%. The expectation is for a slight increase to 5.5% during 2006, but the stated aim of the government's strategy is to build the basis for something more sustained.

The plan is also to reduce the budget deficit to 3.5% of GDP in 2006. Since 2002, the deficit has been cut from 5.6% of GDP to its current 3.8%. With the books closer to being balanced, borrowing costs will go down, adding impetus to growth.

Government expenditure is up though. At approximately RM136.8bn ($36.3bn) the government will spend around 5% more next year than it will this year.

The strategy is to drop the cash in four key areas, stated as being the implementation of pro-active government measures to accelerate economic activities; the provision of a business-friendly environment; the development of human capital; and, of course, the enhancement of the well-being and quality of life of Malaysians.

This latter point will be addressed via a poverty eradication package aimed at the poorest Malaysians. Some RM700m ($186m) will be allotted to various programmes designed to help the disadvantaged, including housing assistance which will make provision for the building and repair of 4000 homes for the extremely poor in rural areas, and the upgrading of rural schools.

Meanwhile, women have been afforded more equality under the Real Property Gains Tax via the budget with the option of exemption given to owners whether they are the husband or the wife. Artists were also afforded some breaks, including an increase in the threshold for tax exemptions on income derived from royalty payments from artistic works, recording discs and tapes, which increased to RM10,000 ($2650) from RM6000 ($1590).

Some sectors are particularly happy with the contents of the budget. The construction sector in particular, which has seen negative growth for the previous few years, was pleased to see a significant amount devoted by the government to new building, upgrades and repairs.

With a figure RM4.3bn ($1.14bn) provided to agencies for maintenance, RM3.6bn ($955m) for civil servant housing and RM2.1bn ($557m) for low-cost housing, there looks to be plenty of work to be done; there is also a special allocation of RM1bn ($265m) for the maintenance of public facilities.

"It's good to see that some big projects will be delivered," explained Hamzah Hasan, Chief Executive of the Construction Industry Development Board, who spoke to OBG soon after the budget. "The development also makes provision for more bridges and small scale infrastructure development in the rural areas, not grand infrastructure projects like those that have gone before."

However not all saw the step as positive and for some it opened up old gripes. Members of the opposition party coalition, the Democratic Action Party (DAP), pointed out that the award of government contracts is limited to indigenous Malay, or bumiputera, contractors.

"DAP regrets that with the billion ringgit construction and maintenance contracts... non-bumi contractors still cannot get government contracts," Announced DAP Secretary General Lim Guan Eng.

"What is the use then of giving licences to non-bumiputera contractors when they cannot bid for government jobs?" he continued before going on to state that a meritocratic and competitive environment was necessary for economic growth.

However, many are optimistic that the construction sector will receive a boost. Indeed, many expect the sector to move back into growth next year, as new working practices come into play and with Malaysian firms having won billions of ringgits worth of projects abroad.

"The budget has given tax relief on the capital costs of business which will give incentives to industry players," continued Hasan. "The government has also announced the enforcement of the MS1065 industrial standard, which will standardise components, making business easier and less costly."

Small- and medium-sized enterprises (SMEs) are also set to receive a boon in a bid to foster domestic growth, with the establishment of an SME bank on October 3, 2005. It will commence lending activities using finance including RM9bn ($2.38bn) raised from the capital market.

It was also decided that the Export Import (EXIM) Bank would come under the authority of the Ministry of Finance, with the expectation that it would play a role in encouraging and supporting entrepreneurs, especially bumiputeras, to move abroad.

Also of interest to capital market watchers was the announcement that stamp duty and real property gains tax on mergers and acquisitions (M&A) of companies listed on Bursa Malaysia will be exempted, subject to approval by the Securities Commission, between Oct 1, 2005 and Dec 31, 2007.

"With these incentives for M&A, we'll see the market capitalisation of firms go up with the number of firms going down," explained Chie K Ngu, head of research at TA Securities. "Institutional investors, particularly foreigners, find some companies too small and this will make the market here more attractive to them."

Other steps, including the upgrading and reorganisation of government-linked companies (GLCs), were also provided for in the budget with the expectation that the government will release more of their holdings in GLCs over the coming years, adding renewed vigour to Bursa Malaysia.

With the budget approved, the coming year will see the effects play out. Whilst the government has to cover its support base, it will never please everyone. In many respects though, the budget has paved the way for the upcoming Ninth Malaysia Plan, which will be approved early next year, giving the current administration its first chance to put into practice its comprehensive policies for Malaysia's future.

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