Malaysia rolls out $78bn budget to restart economy

The government will boost spending on social sectors and infrastructure to soften the blow from Covid-19

The Petronas Twin Towers in Kuala Lumpur, Malaysia. The country retained its position as the world's biggest Islamic economy in the 2020-2021 State of the Global Islamic Economy Report. Getty Images

Malaysia on Friday unveiled the largest budget in its history for 2021, boosting spending on social sectors and infrastructure to soften the blow from the coronavirus pandemic and get the $365 billion economy back on track for rapid growth.

The 322.54bn ringgit ($78bn) spending plan is 8.5 per cent larger than the one passed a year ago, though additional stimulus since then has narrowed the difference. Next year’s fiscal deficit is projected at 5.4 per cent of gross domestic product, down from 6 per cent expected this year, the finance ministry said in a report released alongside the budget.

“This is very much a Covid budget, where obviously the government is spending big in order to restart the economy,” said James Chin, a Malaysian academic and political analyst who heads the Asia Institute at the University of Tasmania. “This is consistent with all the other countries around the world, where governments are overspending to restart the economy.”

The government estimates the new budget, combined with $73bn of stimulus announced earlier this year, will drive the economy – currently mired in recession – to between 6.5 per cent and 7.5 per cent growth next year. That outlook hinges on controlling the pandemic and on a sustained recovery in global demand.

The country’s key stock index closed up 1.2 per cent, adding to Thursday’s 2.5 per cent spurt, which was the biggest gain since March. The ringgit ended Friday’s trading session 0.4 per cent higher at 4.1293 per dollar. Government bonds also rose, with yields falling two to four basis points across the curve.

The first national budget since the pandemic hit, the plan must be approved by month-end.

“It’s a delicate balance between meeting the citizens’ demands and stimulating the economy,” said Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia Bhd. “Fighting against Covid-19 is the key focus and, at the same time, ensuring those who are affected by the pandemic will receive targeted assistance.”

Next year’s gross domestic product forecast marks a sharp rebound from the 4.5 per cent contraction the government expects this year, which would be Malaysia’s worst showing since 2006. The central bank earlier this week projected the economy would shrink 3.5 per cent to 5.5 per cent in 2020.

Next year’s growth forecast isn’t unachievable, but a lot hinges on how the global recovery goes, according to Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities in Singapore.

“The growth target of 6.5 per cent to 7.5 per cent next year doesn’t look stretched considering the low base effect after a contraction of 4.5 per cent this year based on official forecasts,” Mr Phoon said. “Obviously these forecasts need to rely on a quick global recovery from the pandemic, and it is not without downside risks depending on the evolving Covid-19 situation.”

The government is earmarking 69bn ringgit for development spending – up 38 per cent from 2020 – with 15bn ringgit to be spent on transport. Another 17bn ringgit will be channelled to a Covid-19 Fund set up earlier this year, while spending on healthcare is being bumped up 64 per cent to 4.7bn ringgit.

Spending on the social sector will increase by 40.7 per cent and transport by 47.5 per cent, while spending on trade and industry is set to rise by 28 per cent.

Government revenue is expected to rise 4.2 per cent next year to 236.9bn ringgit. Tax collection is seen rebounding, although non-tax revenue is forecast to drop by 15.5 per cent next year, mainly due to lower investment income.

Dividends from Petronas, the national oil company, are expected to shrink by almost half in 2021, to 18bn ringgit.