What to expect from Budget 2012?

By Ronnie Teo, The Borneo Post

KUCHING: With Budget 2012  to be tabled this coming Friday (October 7) in Parliament, Malaysians await with bated breath on what policies will be uncovered to further appeal to the likes of many.

Industry leader s have expressed their concerns given the dismal global economic performance with the region struggling on the path to recover, bogged down by the developed nations.

Indeed, the current global out look of the wor ld’ s economy is nothing less than unfavourable.

With extreme volatility seen in global financial markets as well as equity markets all over experiencing sell-downs following continued concerns over the eurozone debt crisis as well as the slowing economic growth of a once-powerhouse United States, Malaysia’s policymakers are up for a challenge in drawing up a budget that is aptly balanced for a sustainable growth path for our very own economy.

While focusing on the need to pump the economy in the midst of naysayers forecasting the possibility of a double-dip recession, Malaysia would also need to address the issue of a continuing fiscal deficit for the 15th year in 2012.

Certainly, a lot is on the plate of our Prime Minister Datuk Seri Najib Tun Razak, who also wears a dual hat a s Finance Minister This will be his third budget since taking over the post as Prime Minister in 2009.

To c ont inue mapping the country’s growth, this budget is expected to include initiatives to complement the country’s ongoing Economic Transformation Programme (ETP).

In 2011, the government had allocated RM214 billion in total for the budget. Of this amount, RM163 billion was allotted for operational expenditure while the remaining RM51 billion was for development expenditure.

Pre-budget dialogues were held earlier this year over a period of three months, involving about 300 investors, business folk and representatives from non-government organisations.

As such, many believe that this budget will be ‘people-inclusive’, steering to create an economic ecosystem and boost the private sector in a bid towards becoming a high-income nation by the year 2020 as planned.

According to the chief economist from Malaysia Ratings Corporation Bhd (MARC), Nor Zahidi Alias, the focus of the budget would be on reducing the burden of the low and middle income group that were affected by the rising cost of living.

“Based on the CPI, food cost has risen by 22 per cent since July 2007, the last time civil servants received an across the board increase in their salaries,” he told BizHive Weekly.

“The CPI in general rose by 11 per cent within that time frame. So, measures would likely be introduced to relieve some of their burdens.”

RAM Holding Bhd’s group chief economist, Dr Yeah Kim Leng, said the coming Budget could certainly add to the country’s growth momentum by further boosting investors’ confidence and sentiments with new measures aimed at enhancing economic efficiency through market liberalisation and lowering business costs.

He noted that the strong inflow of Foreign Direct Investments (FDIs) of up to RM21.3 billion seen in the first half of 2011 signalled positively of the country’s transformation efforts bearing early fruits.

“The rise in FDIs is an affirmation of foreign investors’ confidence in the country’s long term growth prospects,” Dr Yeah added.

“As such, the government could focus on a re-statement of the New Economic Policy’s 30 p e r cent Bumiputera target as a macro target rather than being implemented selectively across individual industries, firms and businesses.

“This, in turn, will boost investor sentiments and create a freer environment for the sharing of risks and rewards, spurring entrepreneurship and creativity, attracting foreign investments and retaining capi tal in the domest i c economy.

“All the 12 NKEAs will benefit either directly or indirectly from Budget 2012 that is expected to be growth-centred and people-friendly,” affirmed Dr Yeah Kim Leng.

The economist noted that Sarawak would likely continue to be a major benef iciary of increased budgetary allocations to reduce regional disparity in economic development, eliminate hard core poverty and improve rural infrastructures and facilities.

The NKEAs where Sarawak had a comparative advantage such as oil, gas and energy-related industries, including upstream and downstream activities, were expected to receive further boost from the budget, either directly or indirectly, said Dr Yeah.

TA Securities’ head of research, Kaladher Govindan, was of the opinion that Malaysian policy­makers were likely to emphasise on three specific factors this time round.

“Firstly, it would expedite projects highlighted under the ETP to buffer downside from slow­ing external demand. Secondly, it would introduce further liber­alisation and incentives to make businesses more competitive as our neighbours like Indonesia emerge as more conducive invest­ment destinations.

“Finally, it is expected to introduce more structured ben­efits/subsidies for the hard core poor to compensate for the rising income gap and loss in disposable income caused by inflationary pressures,” he added.

“This may include a reduction in the middle income group and slower pace of subsidy reduc­tion.”

Focus on the rakyat

HwangDBS IM’s head of equi­ties, Gan Eng Peng, outlined his expectations of a ‘rakyat-popu­larity-driven’ Budget this time around as the General Elections was looming around the corner.

“However, we do not expect too much from this Budget as on one hand, the government needs to table a ‘feel good’ Budget. On the other hand, it is also in a strait­jacket due to the sluggish state of the global economy,” he noted in an email reply.

“On the overall, we do not ex­pect this it to be a market-move­ment-type of Budget this year as there were a total of RM68 billion of stimulus packages be­ing pumped into the economy in 2009 to pull the economy out of the Global Financial Crisis.

“Remember, these monies will need to be recovered one way or another someday,” he rational­ised.

OCBC Bank (Malaysia) Bhd’s economist, Gundy Cahyadi, hoped to see continuing focus on helping the public in this Budget on the back of rising concerns from the worsening global eco­nomic outlook.

“This budget is going to be interesting in a way because it is happening at the same time that the global econo­my is taking another turn (for the worse) while the government has also kicked off its ETP and seen some encouraging developments in 2011,” he said.

“There is probably going to be a continued focus on how to help the public, especially on matters concerning rising costs and so forth. So, the wage-productivity angle will see quite a focus cer­tainly,” he added.

The same idea was brought for­ward by the head of research from Mercury Securities Sdn Bhd, Edmund Tham, who believed that Budget 2012, being the last budget before the next General Elections, would see emphasis on addressing public issues.

 

“Basically Budget 2012 would probably be the last budget be­fore the next General Elections. The federal government’s budget would likely focus on addressing public issues, such as the rising cost of living,” he affirmed.

“These may include areas such as housing, food supply chain, public transport, healthcare and education which form the main concerns of the Rakyat.”

Boost in economic liberalisa­tion

During his interview with Forbes Asia Magazine in early September, Najib revealed his intentions for another round of economic liberalisation in this coming budget for long-term sus­tainable competitiveness.

He said liberalisation was good for “our long-term sustainable competitiveness of the country, building our intrinsic strengths not through protection or sub­sidies.”

Gan from HwangDBS IM opined that this economic liberalisa­tion was building the country’s competency to be on par with international peers.

“Malaysia has been progres­sively liberalising its economy and has been aggressively doing so over recent years,” he said to BizHive Weekly in an email interview.

“It is a move to develop our human capital pool to be on par with the international peers in order to have an edge in the competitive ‘laissez-faire’ globalised market.

“Days of competing on weaker ringgit for our ex­ports and low-labour cost manufacturing models are long gone with China, India, Vietnam, Thailand and the likes joining the low-cost game,” he added, noting that in order to propel Malaysia to a high income nation, the key was in develop­ing a highly-skilled workforce founded on a knowledge-based economy and to carve out niches in the services industry.

“This is the developed nation model that we can take a leaf from. To me, I would think the best place to seriously start relooking into is our education system and the next step is changing of the local mind­set to be more critical, analytical, innovative and creative.”

OCBC’s Cahyadi believed it was widely expected that the government would aim to lower its deficit for 2012 through this liberalisation stance.

“Analysts would want to watch on several fronts: Fuel subsidies? GST? Privatisation? It is widely expected that the government would lower its deficit for 2012, presumably only slightly, to about five to 5.2 per cent of gross domestic product (GDP) from the estimated 5.4 per cent this year.

“The liberalisation measures would be targeted to do just this: lower spending and boost rev­enue,” he affirmed.

Liberalising too quickly?

Some sources have cited con­cerns that Najib’s action of lib­eralising too quickly would be threatening to the economy.

“How do we define too quickly if the government and people refuse to change?” asked TA Securities’ Govindan.

“The auto industry is a classic example. It failed to improve its competitiveness against in­ternational players for more than twenty five years (since Mahathir’s era) while other less pampered players in countries like South Korea that started much later than us have started to rock the world.

“We are still talking about benefitting a privileged few with APs by extending it, whereas the government can collect the revenue directly. You will never be competitive if you don’t want to understand the true meaning,” he stressed on.

“To be competitive you have to inculcate a merit based culture in the entire system ranging from education, businesses, public service, politics and so on.”

Mercury Securities’ Tham was on the same page, saying, “There is always a trade-off between liberalisation and protectionism. Some sectors are not ready to be liberalised in the sense that the local players cannot compete effectively against foreign com­petitors.”

Dr Yeah begged to differ, though, noting that “liberalising too slowly puts the economy at risk of being left behind by our neighbouring countries that are fast catching up with Malaysia in terms of economic efficiency, market liberalisation and ease of doing business.”

Gan from HwangDBS asserted his idea that further liberalisa­tion plans would be in line with the ETP, as the government initiated in earnest, its efforts to allow the private sector to play a more significant role in the local economy as a whole.

“We have already seen the lib­eralisation in the shareholding of foreign financial institutions and we expect more will come in order to carve Malaysia a space in the international financial industry, especially in the Islamic finance sector,” he disclosed.

Sectors in the spotlight

In a bid to drive more private investments, analysts expected to see a flurry of industry-spe­cific incentives coming up on the table.

MARC’s Nor Zahidi was of the view that the liberalisation process would likely be focused on the services sector, a sector which accounted for almost 60 per cent of the economy.

He added that the vibrancy of the services sector was critical as it provided an avenue to gen­erate higher income which was in line with the government’s aspiration to increase the in­come level of the rakyat.

“Notwithstanding this, liber­alisation measures should be implemented carefully and at a pace which is suitable with the level of development,” he forewarned. “In other words, we should not rush into liberalising all parts of the economy within a short time frame. Proper se­quencing is required in such a process.

 

“A rush in the implementation of liberalisation measures can be detrimental to the economy as evidenced by the crisis that erupted in East Asia in 1998 which was caused by a rapid liberalisation of capital account (without proper establishment of financial market regulatory framework).”

According to TA Securities’ Govindan, focus could also be given to the services sector but “expect some attention on the manufacturing sector as well to improve export competitiveness in terms of price and non-price factors.”

“For instance downstream plantation players may find some adjustment in the tax structure to compete more effec­tively with Indonesian players,” he gave as an example.

Govindan divulged the educa­tion sector (attracting foreign universities and talent), avia­tion (increased flight frequency and landing rights), banking (further relaxation in foreign ownership in banks, especially commercial banks and rules in hiring foreign talents), and healthcare (foreign ownership in private hospitals, incentives to open up biochemical indus­tries and so on) as further pos­sible beneficiaries.

What’s up with taxes?

Manokaran Mottain, the head of research at AmResearch Sdn Bhd believed that the govern­ment may also aim to streamline the current tax structure in Ma­laysia by reducing income tax by one percentage point.

“As it stands, the current corporate tax rate remains at 25 per cent while the highest band of individual income tax stands at 26 per cent. In this regard, certain segments of the population have been lobbying for a tax review before the actual implementation of the the Goods and Services Tax (GST).”

Manokaran cited calls by industry players for both per­sonal and corporate taxes to be reduced to 20 per cent, if the government was serious about attracting FDIs and talents as well as implementing GST in the country.

“This will also serve as a posi­tive step towards preparation for GST by 2014 or 2015,” he opined. “Lower personal income tax will also make it easy for the govern­ment-owned Talent Corporation to attract more skilled workers back to Malaysia.”

The first mention of GST was brought up back in 2005 as a tool to reduce fiscal deficit. Since then, its implementation has been deferred year by year, despite many countries in the region adopting GST or its equivalents as it was accepted by most as a more equitable and efficient tax system.

“Potential tools that could be used to help reduce the fiscal deficit include introducing a clear schedule regarding GST’s implementation,’ believed Monokaran.

Pending implementation of the GST system, Mercury Secu­rities’ Tham held expectations from the government to tweak or offer further rebates or incen­tives for personal income tax payers, such as for environment or welfare causes.

“The government may also announce some updates on the minimum wage policy plan. As usual, further announcements of major infrastructure and development projects are also expected.”

Another segment which might possible see some tax changes is the Real Property Gains Tax (RPGT). HwangDBS IM’s Gan believed an increase from the current five per cent to 30 per cent for assets disposed within five years would serve well to raise revenue to finance mega-projects.

“This will keep us on our toes to ensure out sovereign credit ratings continue to be in good stead,” he added. “Sin tax could be on the cards as well to generate revenue.”

ETP and flowing foreign in­vestments

After achieving the status of a middle-income country, the challenge for Malaysia was now to bridge the gap to a high-income status nation. However, the challenges that lay ahead were hard and difficult. This was due to the fact that Malaysia was no longer competitive against low-income countries as a high-volume, low-cost producer. At the same time, Malaysia has yet to move up the value chain and become competitive against high-income countries.

In order to make the leap, the government introduced the ETP, a comprehensive effort providing strong focus on key sectors as growth engines in ad­dition to economic reforms.

These two qualities provide the strength needed to propel Malaysia into a high income nation, targeting to lift Malaysia’s gross national income per capita to RM48,000 by the year 2020. As such, analysts believed that Budget 2012 would play a complimentary role to ETP and its many initiatives.

“We think that things have been more encouraging for Malaysia this year and certainly the FDI figure is a positive,” OCBC’s Cahyadi said.

“The still positive growth prospect for the country would be an attractive point for foreign investors, but we probably need to see more before Malaysia’s medium-term target can be achieved.

“The early part of the ETP and National Economic Model (NEM) is therefore very crucial,” he affirmed.

“Presumably, investors are still attracted to infrastructure and commodity sectors in Malaysia. However, private participation still seems to be very low and there is probably a need for government to lead by example.”

Cahyadi extended his belief that major companies still seemed to prefer investing overseas. The nation’s net foreign direct investment for example, had been relatively low in the region for the past several years.

“Now that global risks have resurfaced, there is some notion that the private sector may still want to play the wait-and-see mode, and thus, it is crucial for the government to lead the way in the initial stage.”

Nevertheless, Cahyadi noted an improvement on this front in the first half of 2011.

“There are two main factors that led to the inflow in the first half of 2011. One was the effect of ETP – a commendable government effort which has placed Malaysia back in the radar of the international investing community,” pointed out HwangDBS IM’s Gan.

“It has definitely created a lot of excitement. Coupled with the next factor, the bull run that continued from 2010 to early 2011, money was flowing into the emerging markets and Malaysia was one of the favourites.

“Unfortunately, the August bloodbath resulted in the spike in investor risk-aversions. Many foreign investors have sold-down their positions in risky assets such as emerging markets equities, regardless of the state of the fundamentals. It has been the case of ‘sell first, ask questions later’.

“However, foreign, long-term investors who can see the poten­tial in our country’s economy and strong fundamentals will continue to stay invested.”

Analysts and indusrty sources alike concur that the upcoming reveal of Budget 2012 will deter­mine the nation’s standing in the global economy as the Rakyat heads towards Vision 2020.