12 September 2023

• The 12th Malaysia Plan (12MP) Mid-Term Review tabled, specifically targeting higher economic growth and lower fiscal deficit-to-Gross Domestic Product (GDP). The Revised 12MP contains 17 so-called “big bold” measures to tackle issues plaguing the Malaysian economy, with key initiatives such as better fiscal sustainability (from broader revenue base and retargeted subsidies) and enhancing domestic consumption (via a progressive wage policy).
• Revised 12MP GDP growth target revised upwards to 5.0% – 6.0% p.a., up from original 4.5% – 5.5% range. Private consumption and investments (which contribute ~60% and ~20% to GDP respectively) are expected to remain as key economic drivers, which the government intends to enhance further by increasing labour income share of GDP to 40% (increasing consumption power) as well as attracting investments in “high growth high values” industries. Nevertheless, GDP growth for 2023 and 2024 faces downside risk from the uncertainty in the external environment, although we derive comfort from Malaysia’s stable labour market which underpins private consumption.
• Fiscal deficit-to-GDP target of 3.0% – 3.5% by 2025 could be a tough act to follow. We note that the Revised 12MP’s fiscal deficit-to-GDP target of 3.0% – 3.5% is predicated on fiscal deficits falling to ~RM65bil, which could be tough to achieve due to the corresponding increase in allocations for Development Expenditures (DE) (from RM400bil to RM415bil). Given that ~RM230bil of DE is to be spent up till 2023, this implies an additional RM90bil each year of DE for 2024 and 2025. We view the higher DE spending as likely due to the confirmation of various infrastructure projects (refer to Table 1). Thus, a scenario where the DE allocation of RM415bil is fully utilised would likely see fiscal deficit-to-GDP fall to 4.8% and 4.1% in 2024 and 2025 respectively (2022: 5.6%, 2023 (f): 5.0%). This would represent an improvement for fiscal deficit-to-GDP, although it remains above the 3.0% – 3.5% Revised 12MP target range.

Notable transport and logistics projects:

•   Upgrading of the Senai-Desaru Expressway and the North-South Expressway
•   Widening of the North-South Expressway (from Yong Peng to North Senai) in phases
•   Construction of Pan Borneo Highway Sabah Phase 1B
•   Commencement of the Penang Light Rail Transit (LRT) project
•   Expansion of the Penang International Airport
•   Development of a new port on Carey Island to strengthen Port Klang as a regional shipping hub

• Higher forecasted revenues offset by similar rise in operating expenditures. Revenue generating measures such as a capital gains tax in 2024 have been floated, while the reintroduction of the Goods and Services Tax (GST) has not been ruled out. Nevertheless, if the government intends to fully utilise its DE allocation AND meet its fiscal deficit targets, improvements could be in the form of revenue generation (via GST reimplementation) or expenditure control (gradual removal of subsidies).
  • Better revenue generation – Reimplementation of GST would boost indirect tax receipts. For example, GST collection was RM44bil in 2017, which fell to RM27bil in 2019 upon being replaced by the Sales and Services Tax (SST).
  • Expenditure control – Reduce the current subsidy bill, with the greatest component being fuel subsidies (2022: RM50.8bil). The government intends to gradually shift towards a “targeted” subsidy scheme for electricity, RON95 and diesel in 2024, although any move is dependent on the launch of the Padu database system (to facilitate targeting of subsidies for M40 and B40). However, expectations for
    substantial reductions in subsidies may need to be tempered as the government has not revised its inflation target upwards for 2024 and 2025.

Opus’s opinion:

• Certain sectors to benefit from Revised 12MP commitments towards infrastructure projects and consumption. We expect construction names to derive benefits from the 11 new transportation and logistics projects such as the Penang Light Rail Transit (LRT) project, although MRT3’s approval remains contingent on the government’s ongoing review for Public-Private Partnerships. Similarly, spillover effects on Malaysian consumers and private consumption could act as a tailwind for the banking sector (sustained demand for credit), especially if unemployment remains stable heading into 2024.
• Government bond supply will likely remain elevated. Net issuances of government bonds will likely track closely to DE spending, as Malaysia’s revenue is largely used to meet operating expenditures. Under a scenario where DE spending is RM90bil in 2024 and 2025, net issuances could approach the RM100bil levels in pandemic years, with debt-to-GDP pushing closer to the ceiling of 65%.
• The Malaysian bond market reaction was muted as markets were ready following earlier government announcements (MADANI Economy Framework, National Energy Transition and New Industrial Master Plan 2030). Moving forward, we expect more concrete details to emerge upon the tabling of Budget 2024 in October, especially with regards to initiatives such as targeted subsidies and the progressive wage policy.