Malaysia unveils expansionary budget to boost pandemic recovery

Malaysia's Finance Minister Tengku Zafrul holds a bag containing the 2021 budget as he poses for a picture outside Finance Ministry building, in Putrajaya, Malaysia

Malaysia’s government unveiled an expansionary budget on Friday to spur activity in an economy badly hit by the COVID-19 pandemic, amid uncertainty over the stability of the ruling coalition.

Parliament is expected to vote on the proposed measures on Nov. 25, and the passage of the budget is seen as vital for both the economy and Prime Minister Muhyiddin Yassin, whose position is under threat from the opposition and cracks in his own coalition after just eight months in office.

The coalition has a razor thin majority, and if the budget were to be voted down by parliament it would amount to a no confidence vote for Muhyiddin, and would plunge the country into more political instability.

Presenting the government first budget, Finance Minister Tengku Zafrul Abdul Aziz said the focus was on three priorities – the people’s welfare, business continuity and economic resilience to help the country overcome the coronavirus crisis.

“Never in modern human history has a pandemic had such a huge impact… this is an unprecedented crisis,” Tengku Zafrul told parliament.

The government boosted spending in the 2021 budget by 2.5% to 322.5 billion ringgit ($77.94 billion) even as the fiscal deficit is expected to hit 6% this year – its highest since the 2009 global financial crisis, a government report showed.

“There has been an urgent need to ensure substantial stimulus measures and (the) economic recovery plan are implemented expeditiously,” Muhyiddin said in his foreword for the government’s 2021 fiscal outlook report, released ahead of the budget speech.

Spending grew in 2020 as the government rolled out 305 billion ringgit worth of stimulus packages to cushion the blow from COVID-19, while revenues shrank along with the economy and were projected to fall 4.5% this year, the report showed.

But the fiscal deficit will likely narrow slightly in 2021 to 5.4%, with the economy seen rebounding 6.5-7.5% and revenues rising next year on improved domestic and global demand, it said.

Malaysia’s trade-reliant economy suffered its first contraction in over a decade in the second quarter, as the coronavirus outbreak hit business activity and exports, causing gross domestic product (GDP) to drop 17.1%.

Growth next year is expected to be supported by a 2.7% rise in gross exports after a 5.2% fall in 2020, according to a separate report on the economic outlook.

But government debt is also expected to rise moderately to 61% of GDP in 2021 – above the government’s self-imposed limit of 60% – as it boosts borrowing to finance fiscal support.

To help families meet their living costs, the government will allocate 28 billion ringgit to fund subsidies, aid and incentives, besides 6.5 billion ringgit for cash aid programmes, Tengku Zafrul said.

It will also propose to raise by 20 billion ringgit the ceiling of a newly established COVID-19 fund for aid packages, the needs of frontline workers and the procurement of vaccines.

The total spending increase includes a 4.3% rise in the operating budget – the cost of running the government – to 236.5 billion ringgit, while development spending on items such as infrastructure will jump 38% to 69 billion ringgit in 2021.

Revenue meanwhile is seen rising 4.2% to 236.9 billion ringgit next year, including an estimated 18 billion ringgit in dividends from state energy firm Petronas [PETR.UL].

Monetary policy will continue to provide support to the economic recovery next year, the government said in the economic outlook report, flagging “the resurgence of COVID-19 cases, geopolitical tensions and weak commodity prices” as downside risks.

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