Chief Economist’s Insights

25 March 2021

Global Economics & Market Strategy

Malaysia: Public Infrastructure Spending Likely to Disappoint in 2021

 We expect public infrastructure spending, which includes Group Chief Economist & Head, Market Research

both the federal government and non-financial public Dr. Sailesh K. Jha corporations (NFPCs) development expenditures, to +603 9280 8880 surprise on the downside in 2021. [email protected]

Senior Economist  However, with consumer related fiscal spending picking Nazmi Idrus up in 2021, the fiscal impulse to the economy will be +603 9280 2179 positive this year compared to a negative impulse in 2020. [email protected]

 We revise up our 2021 fiscal deficit forecast to 6% of GDP

from 5.5%. The Ministry of Finance (MoF) revised up its guidance to -6% from -5.4% recently due to the implementation of the PEMERKASA package on March 17.

Figure 1: RHB development expenditures forecast Figure 2: Fiscal stance improving, supportive of GDP

MYRbn Index % YoY Federal Government Development Expenditure Fiscal stance of

120

NFPC Capital Expenditure 0.030 12.0 100 10.0

0.020 Forecast

Forecast 8.0 0.010 80 6.0 0.000 4.0 60 -0.010 2.0 -0.020 0.0 -2.0 40 -0.030 Fiscal stance -4.0 -0.040 20 Real GDP growth (RHS) -6.0 -0.050 -8.0

0 -0.060 -10.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2021f

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021f Source: MOF, CEIC, RHB Economics & Market Strategy Source: CEIC, RHB Economics & Market Strategy

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Malaysia Chief Economist’s Insights 25 March 2021

Major Infrastructure Projects Hampered by Changing Landscape

We held virtual meeting with companies in the construction and infrastructure sector recently. In our view, 2021 development expenditures (which includes Federal and Non-Financial Public Corporations) will print around MYR138 bn (Figure 3) versus the government’s estimate of MYR148 bn and the estimated MYR126.5 bn for 2020. The main implications of this trajectory of public infrastructure spending are: • Sectors related to government development spending is where the main downside surprise will occur in 2021. Hopefully the 12th Malaysia Plan is released by 2H21 and provides some clarity on the future of infrastructure spending in the country. • Fiscal policy on a cyclically adjusted primary balance perspective will continue to be contractionary in 2021, though of a much lower degree of contraction compared to 2020 (Figure 2). However, the fiscal impulse will be positive in 2021. • We estimate that the fiscal multiplier effect from the 2021 budget is around 0.3 and thus will contribute 0.34 ppt to GDP growth in 2021. • On back of the announcement of the PEMERKASA package on March 17, we revise up our 2021 fiscal deficit forecast to 6% of GDP from -5.4%. The Ministry of Finance has recently guided that the 2021 fiscal deficit could print 6%.

The main restraints to implementation of the MoF development expenditure program of MYR148 bn, particularly of the large projects (Figure 5), are changes in alignment, labour related issues, in some cases funding issues, and mode of project implementation. Our public infrastructure projects tracker (Figure 5) shows that progress in the public infrastructure sector is slow. These plethora of issues are reflected in demand for basic materials showing no signs of acceleration (Figure 4), which should show a rise if indeed tenders are forthcoming in the near-term. While the disruption caused by the movement control orders over the last one year has also been a significant contributing factor to the public infrastructure program and development expenditure rollouts, the other aforementioned cyclical restraints need to be highlighted as well.

Figure 3: Our 2021 development spending forecast… Figure 4: …is lower vs MoF. Basic materials sales soft

MYRbn % MoM, 3MMA Federal Government Development Expenditure Sales 120 80 NFPC Capital Expenditure

100 Forecast 60 Cement & concrete Basic iron & steel 80 40

60 20

40 0

-20 20 -40

0

2005 2017 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2018 2019 2020 2021f NFPC: Non-Financial Public Corporations Source: CEIC, RHB Economics & Market Strategy Source: CEIC, RHB Economics & Market Strategy

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Figure 5: Our proprietary public infrastructure projects tracker suggests slow momentum…

Project Estimated Cost completion 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 2022 2023 2024 ≥2025 (MYR bn) date

Major projects

19% Slow progress, likely East Coast Rail Link 50.61 2026 (Dec) delays 70% MRT2 30.53 2023 (Phase 1 Ongoing and on track - Mar) Potential funding LRT3 31.65 02-2024 40% 46% issues. Delays possibly Pan Borneo Highway Some slowing of 18.80 2023 50% Sarawak progress 2040 (Phase Slow award of new Pan Borneo Highway 10.12 30% 1) contracts

Central Spine Road 9.50 2025 20% Limited information

Langat 2 Water Treatment Phase 1 - Phase 2 - Completion 8.00 2023 Plant Completion (2028) Klang Valley Double Track 1.41 2021 80% Ongoing project Phase 1 (KVDT1) Klang Valley Double Track 4.48 2024 24% Re-tender Phase 2 (KVDT2)

Baleh Hydroelectric Dam 8.00 2026 60% Ongoing project

West Coast Expressway 1.56 2024 70% Ongoing project

Ongoing project. Gemas - JB Electrified 9.55 2022 Completion delayed Double Track due to MCO Sarawak Water Supply Grid No information on 18.00 2025 Programme tenders Sarawak Second Trunk No information on 6.00 2025 Road tenders No information on Sarawak Coastal Road 16.48 2027 tenders National Centre for Food No information on 0.13 2021 Safety tenders

Kedah Rubber City pojects 0.39 2030 30% Ongoing project

Serdang Hospital No information on 0.31 2021 Cardiology Centre tenders No information on Lawas Hospital 0.18 2023 tenders Airport No information on 0.18 5-2021 expansion tenders

Source: Various industry sources * privately funded ** State Government project

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Figure 5 (Continued): … across the board

Project Estimated Cost completion 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 2022 2023 2024 ≥2025 (MYR bn) date

Selected future projects

Penang Transport Master 46.0 1-2025 Delayed Plan**

Start Sabah-Sarawak Link Road 5.2 2030 No visibility on tenders (Apr) JB - Singapore Rapid 10.0 2026 Doesn't look feasible Transit System (RTS) Sarawak Water Supply 18.00 2025 No information Grid Masterplan

Westports expansion* 10.0 2040 No information

Start Launch Johor Bus Rapid Transit 2.6 2021 No information (Q1) (Q1) Bay Container 1.3 11-2023 No information Port Expansion Palekbang-Kota Bharu Start 0.3 12-2023 Ongoing bridge (Sept) Upgrade of Kajang & - - No information Hospital

Under the pipeline

Kuala Lumpur - Singapore 70-110 - Cancelled currently High Speed Rail

MRT3 22.5-25 2025 No visibility on tenders

No visibility on this Bandar Malaysia - project Serendah - Port Klang 5.00 - No information bypass

Kulim Airport* 6.80 - No information

Labuan - Menumbok 5.00 - No information bridge*

Tioman Island Airport* 1.20 - No information

Penang International 0.8-0.9 - No information Airport expansion* Cameron Highlands 0.80 - bypass road

Klang 3rd Bridge Phase 2 0.32 - No information

Sungai Marang bridge 0.08 - No information upgrade Jus Reservoir water - - No information transfer project Upgrade on Federal Road - - No information Route 4

Pulau Indah Ring Road 4.00 - No information

Source: Various industry sources * privately funded ** State Government project

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Malaysia Chief Economist’s Insights 25 March 2021

In this report we define development expenditures as the sum of federal development expenditure and capital expenditure by non-financial public corporations (NFPC1). We use the terms development expenditures and public infrastructure spending inter-changeably. Among all public sector projects valued MYR2bn and above, almost 90% of the projects are transport-oriented, making the transport sector the largest recipient of development expenditure funds. This has been the case in recent years as the 11th Malaysia Plan (2016-2020) target lays out initiatives for construction of a seamless transport system and enhanced mobility. Part of the target involves ensuring that 40% of transport in the Greater Kuala Lumpur-Klang Valley region is composed of public options. In our view, currently the public infrastructure program is mainly driven by a number of ongoing mega projects not new projects, hence our assessment of downside risks to development expenditures in 2021. The ongoing projects include East Coast Rail Link (ECRL), MRT2, LRT3, Pan Borneo Highway, Klang Valley Double Track Phase 1 and 2, Baleh Hydroelectric dam, West Coast Expressway, and Jemas-JB Electrified double track (Figure 5). Even among these projects, as can be seen, the large projects such as ECRL, LRT3, and Pan-Borneo highway, are facing delays in progress. In terms of new projects whose engineering designs are already completed such as MRT3, there is no visibility in terms of tenders. Other large projects such as the Sarawak Water Supply Grid and Sarawak Second Trunk Road projects don’t seem to be coming up for tenders in 2021. In addition, the Kuala Lumpur to Singapore High Speed Railway (HSR) project is unlikely to be rejuvenated this year per our conversations with public sector contacts in Singapore. We also believe a purely domestic component of the HSR project is unlikely to make progress in 2021 due to economic considerations. Changes in alignment are one of the major causes in delays of ongoing projects and tender announcements for new projects. This situation is unlikely to change in 2021, in our view. For example, with regards to the ongoing ECRL project there is a possibility that the southern sector needs to be realigned and revert back to the original engineering plan. In addition, there have been issues with regards to the process of tender awards, and cost cutting issues. The MRT3 project feasibility study is done but the alignment is being re-examined and the cost structure is also being reviewed. The HSR project is stalled not only due to differences in opinion on project management issues between Malaysia and Singapore, but also due to a few other factors. These include differences in opinions on the alignment and the cost structure. In addition, land acquisition issues have also plagued the HSR project in our view. Given the existing alignment and land acquisition issues for the HSR project, the idea that a purely domestic HSR project could materialize in terms of tender announcements in 2021 is a very low probability event risk in our view. Besides alignment issues restraining the public infrastructure program, labour supply related issues also remain a hindrance for much of 2021, in our view. The Malaysian construction sector is hampered by its ability to obtain domestic source of labour and has to depend on foreign workers. This is made worse due to the ongoing border restrictions. Anecdotal evidence suggests that some foreign worker from Indonesia left Malaysia to go back home since the employment and salary increment opportunities are better. Indonesia is experiencing a rapid implementation of its public infrastructure program, hence the demand for labour is very strong compared to the supply of labour. These impediments from foreign labour supply could lead to more acute shortage of staff in the construction sector in Malaysia and can cause further delays to implementation of public infrastructure projects. In addition, there are obstacles to complying to the MCO’s Standard Operating Procedures (SOP) especially among the smaller contractors. These companies have limited capacity to implement the stringent requirements such as having a foreign worker Centralised Labour Quarters (CLQs). In addition, foreign workers are now required to undergo the COVID- 19 tests with the cost borne by the employers (which is partially mitigated by measures included in the recently announced PEMERKASA package). Even with these requirements being fulfilled by employers, risks of future disruptions if infections at construction sites rise again can’t be completely ruled out. Funding issues related to some large projects also restrains implementation of the public infrastructure program in 2021 and potentially in future years. There have been occurrences over the last 6-12 months of contractors not being paid on time, which include those related to the LRT3 project. The Pan-Borneo Sabah, Pan-Borneo Sarawak, HSR, some components of the Penang Transport Master Plan, and the MRT3 project also face funding issues. Lastly, Malaysia’s consolidated public-sector debt, which represents the debts of the federal government, state governments, NFPCs, and sovereign-guaranteed statutory bodies expanded to MYR1.2 tn or 85.5% of GDP as of end-

1 Non-Financial Public Corporations (NFPC) comprises of 28 major corporations including Axiata Group Berhad, Bintulu Port Holdings Berhad, Boustead Holdings Berhad, Cement Industries (Sabah) Sdn. Bhd., Indah Water Konsortium Sdn. Bhd., IJN Holdings Sdn. Bhd., Keretapi Tanah Melayu Berhad, Kulim (Malaysia) Berhad, Malaysia Aviation Group Berhad, Malaysia Airport Holdings Berhad, Mass Rapid Transit Corporation Sdn. Bhd., MIMOS Berhad, Malaysia Digital Economy Corporation Sdn. Bhd., Penerbangan Malaysia Berhad, Petroliam Nasional Berhad (PETRONAS), PPES Works (Sarawak) Sdn. Bhd., Prasarana Malaysia Berhad, Rakyat Berjaya Sdn. Bhd., Sabah Energy Corporation Sdn. Bhd., Sabah Ports Sdn. Bhd., Silterra Malaysia Sdn. Bhd., Syarikat Perumahan Negara Berhad, Syarikat SESCO Berhad, Telekom Malaysia Berhad, Tenaga Nasional Berhad, TH Plantation Berhad, UDA Holdings Berhad and UEM Group Berhad

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Malaysia Chief Economist’s Insights 25 March 2021

June 2020 from 72.5% at end-2019. Against the backdrop of an uncertain economic environment over the next few years, borrowings could remain substantial and may prompt the government to re-examine the pipeline of future projects (Figure 5) in order to embark on a path of debt consolidation. Future commitments by federal and state governments have been added to the list of projects in the pipe line, which are planned for the next few years (Figure 5). However, limited visibility exists on the timing of tenders, award of contracts, and actual start of construction of these projects. Lastly, several large projects face uncertainty on whether they will proceed on a public private partnership (PPP) model basis or will the path forward be via alternative modes. These projects include MRT3, Pan Borneo Sabah Highway, and the JB-Singapore RTS link.

Small Fiscal Impulse to the Economy in 2021

Despite our cautious view on the 2021 development expenditure program, we believe the announcement of the MYR20 bn PEMERKASA package on March 17 will generate a positive fiscal impulse to the economy in 2021 (Figure 6) after having been negative in 2020 and 2019. Note that prior to the announcement of the PEMERKASA package (Figure 8) the fiscal impulse to the economy in 2021 would have been negative (Figure 7). Over the last decade, the fiscal impulse to the economy has been negative due to the government embarking on a path of debt consolidation and limited usage of discretionary policy which focused on inducing a positive impulse to the economy. Similar to other emerging markets, the concept of fiscal impulse and its efficacy could be of lesser importance in Malaysia due to a variety of reasons beyond the scope of this report. The fiscal impulse is defined as the difference in the current year fiscal stance minus the previous year’s fiscal stance of the country.2 The fiscal stance is measured by the cyclically adjusted primary balance (CAPB). A negative fiscal stance implies that the budget has a contractionary impact on real GDP growth. A positive fiscal stance implies that the budget has an expansionary impact on GDP growth. When measuring a country’s fiscal stance, it is important to adjust the headline fiscal balance by removing the cyclical factors and assess the underlying fiscal position of the government. As an example, when economic activity decelerates, typically revenue growth falls and automatic stabilizers such as unemployment benefits and cash transfers to consumers rise in response to the slow-down in the economy. Hence, looking at only the changes in the fiscal balance across the business cycle may be erroneous since this may give a false impression of expansionary or contractionary discretionary policy since these variations may solely be driven by cyclical factors.

Figure 6: PEMERKASA package generates positive Figure 7: Pre-package, the fiscal impulse to the fiscal impulse to the economy in 2021 economy in 2021 would have been negative

Index % YoY Index % YoY

Fiscal stance of Malaysia (New) Fiscal stance of Malaysia (Old)

0.030 12.0 0.030 12.0 0.020 10.0

0.020 10.0 Forecast Forecast 8.0 8.0 0.010 0.010 6.0 6.0 0.000 0.000 4.0 4.0 -0.010 2.0 -0.010 2.0 -0.020 0.0 -0.020 0.0 -2.0 -2.0 -0.030 -0.030 -4.0 Fiscal stance -4.0 -0.040 Fiscal stance -0.040 -6.0 -6.0 Real GDP growth (RHS) -0.050 Real GDP growth (RHS) -8.0 -0.050 -8.0 -0.060 -10.0

-0.060 -10.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2006 2015 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2016 2017 2018 2019 2020 2021f 2021f Fiscal stance is an estimate of the amount of expansionary/contractionary Source: CEIC, RHB Economics & Market Strategy pressures placed by the budget on aggregate demand. Source: CEIC, RHB Economics & Market Strategy

2 See Fedelino, Annalisa, Anna Ivanova, and Mark Horton, Computing Cyclically Adjusted Balances and Automatic Stabilizers, IMF Technical Notes and Manuals 09/05, 2009. See also Misra, Sangita and Saurabh Ghosh, Quantifying the Cyclically Adjusted Fiscal Stance for India, Working Paer 04/2014, Reserve Bank of India.

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Malaysia Chief Economist’s Insights 25 March 2021

Besides measuring the fiscal impulse to the economy, which is a directional concept, it’s important to compute the fiscal multiplier based on our estimate of 2021 government expenditures of MYR328.9 bn (Figure 9). We find that this is a small figure. Based on a “bucket approach” analysis, the fiscal multiplier is small and is roughly 0.30. This provides around a 0.34 percentage point boost to real GDP growth in 2021.3 Having discussed the fiscal impulse to the economy and fiscal multiplier in Malaysia, we turn our focus to the details of the PEMERKASA package (Figure 8). This policy measure provides some support to consumers and SMEs but doesn’t alter our 1Q21 and 2Q21 GDP growth forecasts of -2.6% YoY and 16.4%, respectively. 4Q21 GDP printed -3.4%. We maintain our 2021 GDP growth forecast of 5.4%YoY versus the Bloomberg consensus estimate of 5.5%. In our 2021 GDP growth forecast, the unexpected further loosening of fiscal policy via the PEMERKASA package announcement compensates for our previously held view of overnight policy interest (OPR) cuts by Bank Negara which we changed to a no OPR cuts forecast on March 4, 2021. The MoF announced another MYR20 bn relief package on the March 17, of which MYR11 bn is a fiscal injection and isn’t incorporated in the current budget’s Covid-19 relief fund. The PEMERKASA measures provide some support to the economy over the next few months and is mainly focused on consumers and SMEs. The measures include tax deferments, one-of grants and aid payments, and appear particularly targeted to the vulnerable sectors including tourism-related industries. The measures appear broad in scope and could help some businesses to stay afloat.

Figure 8: PEMERKASA package provides some support to consumers and SMEs MEASURES i. National COVID-19 Immunization Program • Increase in allocation to RM5 bn from RM3 bn • Cash handouts for Bantuan-Prihatin Rakyat (BPR) recipients raised to RM300 from RM180. To be launched in early May • One-off cash RM500 assistance to those in the B40 who have lost their income. An extra RM500 will be distributed to BPR recipients who earn RM1000 and below ii. B40 and families • Allocation of RM100 mn to 300,000 low-income households in major cities to purchase household items using "cashless" payment-systems • Telecommunications firms to "crowdsource" used electronic device under the MyBAIKHATI program • Allocation for small-scale projects increased from RM2.5bn to RM5bn. Contractors involved will be from G1 to G4 categories • Hiring incentives expanded to temporary workers and gig workers. Registered employers will receive RM200 for each worker hired • location of RM700 mn for wage subsidies. Measure is extended for another 3-months iii. SMEs, entrepreneurs & businesses for tourism, wholesale and retail, gyms, spas and other businesses affected by MCO. • Tax cuts of up to RM50,000 per company enrolled in the Safe@Work initiative. • Allocation for micro-credit schemes increased to RM1.5bn from RM1bn. • Allocation of RM50mn for Pemerkasa-Nita microcredit scheme • RM10mn in matching grants for female entrepreneurs under the SOCSO Scheme • One-off RM600 for registered homestay operators • One-off RM3,000 special grants for 5,000 registered tourism agencies. • Exemption of entertainment duties from entry fees for entertainment venues in all iv. Tourism industry federal territories. • Expansion of income tax relief of up to RM1,000 covering the purchase of tourism packages. • Extension of the 10 percent electricity bill discounts until 30 June 2021. The extension will cost RM135 mn. v. Special needs • Disabled Workers Allowance eligibility expanded to those earning RM1,500 and below per month. This will cost RM26 mn. vi. Keeping costs low • The retail price of RON95 and diesel are fixed at RM2.05 per litre and RM2.15 per litre respectively. Source: Various media publications, RHB Economics & Market Strategy

3 For details of the “bucket approach” to compute fiscal multipliers see Batini, Nicoletta, Luc Eyraud, and Anke Weber, A Simple Method to Compute Fiscal Multipliers, IMF Working Paper 14/93, 2014, International Monetary Fund (IMF)

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Fiscal Deficit Forecast Revised Up to 6% of GDP from -5.4% On back of the unexpected PEMERKASA package announcement on March 17, we revise up our 2021 fiscal deficit forecast to 6% of GDP from -5.4% of GDP. In level terms, our fiscal deficit forecast is MYR 91.8 bn compared to the MoF estimate of MYR 84.8 bn (Figure 16). Without the PEMERKASA package, we would have achieved our initial fiscal deficit target. The main revision to our 2021 fiscal deficit forecast is due to an upward revision to a few expenditure line items but we have kept our initial revenues forecasts unchanged. We increased the subsidies expenditure by MYR4 bn, the grants and transfers line item by MYR1.4 bn (which is for SMEs and cash transfers), and the development expenditures line item by 3 bn (which is for small scale projects). On the revenues side of the fiscal accounts we project a smaller pace of corporate income tax collections compared to the MoF projections (Figure 16) due to our lower GDP growth projection for 2021 (Figure 10). Historically petroleum income tax collections increase to around MYR20 bn with Brent oil at 57 USD/brl (versus the MoF estimate of MYR13 bn). Petroleum royalties usually print between MYR5-6 bn (versus the MoF estimate of MYR4.3 bn) when oil prices are in the 50-60 USD/brl range. The palm oil export levy and strong exports contributes to our higher export duties estimate compared to the MoF (Figure 16). Our projections for excise duties are higher compared to the MoF due to robust sales of motor vehicles.

Figure 9: RHB fiscal deficit forecast revised to 6% of GDP from -5.4%

2019 2020 2021F MOF 2021F MOF 2021F RHB 2021F RHB %YoY %YoY MYR bn change change Revenue 264.4 225.1 236.9 5.3 237.1 5.3 Total expenditure 317.5 312.7 321.7 2.9 328.9 5.2 Operating expenditure 263.3 224.6 236.5 5.3 248.9 10.8 Gross development expenditure 54.2 51.4 69.0 34.2 63.0 22.6 Less : Loan recoveries 1.6 1.3 0.8 -38.5 1.0 -23.1 Net development expenditure 52.57 50.1 68.2 - 62.0 - COVID-19 fund - 38.0 17.0 - 17.0 - Overall balance -51.5 -87.6 -84.8 -3.2 -91.8 4.7 % to GDP -3.4 -6.2 -5.4 - -6.0 -

Source: Ministry of Finance (MOF), RHB Economics & Market Strategy

Figure 10: We are more optimistic on oil prices compared to the MoF

2019 2020 2021F 2019 MOF Actual 2020 MOF Actual 2021 MOF RHB

Oil prices (USD/barrel) 72 64 70 42 43 57

Current account (% GDP) 2.2 3.4 1.8 4.3 1.3 2.3

GDP growth (% YoY) 4.9 4.3 4.8 -5.6 6.5-7.5 5.4

CPI inflation (%YoY) 2.5-3.5 0.7 2.0 -1.1 2.5 2.0 Source: Ministry of Finance (MOF), RHB Economics & Market Strategy

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Figure 11: Outlook for total expenditures and… Figure 12: …revenues predicated on growth forecast

% YoY Nominal GDP % YoY Nominal GDP

30 Nominal expenditure 40 Nominal tax revenue 25 30

20

Forecast Forecast 15 20 10 5 10 0 0 -5 -10 -10 -15 -20

-20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

2021f

1997 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1995 2021f Source: CEIC, RHB Economics & Market Strategy Source: CEIC, RHB Economics & Market Strategy

Figure 13: Similarly for corporate income tax and… Figure 14: …personal income tax revenues %YoY %YoY %YoY %YoY

Corporate income tax Personal income Tax

40 20.0 40 Nominal GDP growth 20.0 Nominal GDP growth 30

30 15.0 15.0

Forecast Forecast 20 20 10.0 10.0 10 10 5.0 5.0 0 0 0.0 0.0 -10 -10 -20 -5.0 -20 -5.0

-30 -10.0 -30 -10.0

2006 2014 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2015 2016 2017 2018 2019 2020 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F 2021F Source: CEIC, RHB Economics & Market Strategy Source: CEIC, RHB Economics & Market Strategy

Risks to Our Fiscal Forecasts

• If oil prices continue to track higher and average significantly above 57 USD/brl in 2021, our 6% of GDP fiscal deficit forecast would be too high since petroleum related revenues would be higher than what’s captured in our current forecasts (Figure 15). • Our 2021 GDP growth forecast is 5.4%YoY. If growth surprises us on the upside, our nominal revenue growth forecast of 5.3% YoY would be rendered too conservative. As a result, the risks to our 2021 fiscal deficit forecast of 6% of GDP would be tilted towards a lower print. • If on the other hand, 2021 GDP growth turns out be much weaker than anticipated, the MoF could engage in further announcements of fiscal stimulus packages. As a result, our nominal expenditure growth forecast of 5.2% YoY could be rendered as too low. Hence, the risks to our fiscal deficit forecast of 6% of GDP would be tilted to the upside.

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Figure 15: 2021 oil revenues could surprise high if Brent oil averages well above 57 USD/brl this year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E Revenue 99 106 124 140 160 159 160 185 208 213 221 219 212 220 233 264 225 237 Petroleum Income Tax 11 15 21 20 24 27 19 28 34 30 27 12 8 12 20 21 13 17 Petroleum Royalty 2 3 4 4 6 5 5 5 6 6 7 5 4 4 5 6 4 5.5 Petronas Dividend 16 24 30 30 30 28 27 29 26 16 16 24 54 34 18 Non-oil revenue 85 88 99 99 106 97 106 123 140 150 158 176 184 188 184 184 174 196

Share to toal revenue (%) 29.0 33.9 39.1 33.6 33.9 32.9 29.5 28.3 19.5 13.2 14.6 21.2 30.5 22.6 17.2 Brent oil price (USD/barrel) 38.3 54.4 65.4 72.7 97.6 61.9 79.6 110.9 112.0 108.9 98.9 52.4 44.0 54.4 71.1 64.0 42.8 57.0 Source: Ministry of Finance (MoF), RHB Economics & Market Strategy

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Malaysia Chief Economist’s Insights 25 March 2021

Appendix

Figure 16: RHB Fiscal Projections in detail 2018 2019 2019 2019 2020 2020 2020 2021F 2021 2021F 2021F actual actual MOF MOF actual MOF MOF MOF MOF RHB RHB %YoY %YoY %YoY %YoY MYRbn MYRbn MYRbn MYRbn MYRbn MYRbn MYRbn change change change change Total Revenue 232.9 264.4 261.8 12.4 225.1 244.5 -7.5 236.9 5.3 237.1 5.3 Total expenditure 287.1 317.5 316.6 10.3 312.7 337.0 6.1 321.7 2.9 328.9 5.2 Direct Tax 130.0 134.7 135.1 3.9 112.5 142.7 5.9 131.9 17.2 129.1 14.7 Corporate Tax 66.5 63.8 70.2 5.6 50.1 75.5 18.4 64.6 29.0 56.7 13.3 Petroleum Income Tax 20.1 20.8 18.1 -9.9 12.8 17.9 -14.0 13.0 1.8 17.3 35.5 Individual Income Tax 32.6 38.7 35.0 7.2 39.0 37.4 -3.4 42.4 8.9 43.0 10.4 Others 10.8 11.5 11.8 9.6 10.7 11.9 3.6 11.9 11.0 12.1 12.9 Indirect Tax 44.0 45.8 41.1 -6.7 41.9 47.0 2.6 42.5 1.5 46.5 11.0 Export Duties 1.7 1.1 1.6 -7.0 0.7 1.3 15.5 0.9 23.6 0.9 20.6 Import Duties 2.9 2.7 2.9 1.5 2.3 2.8 2.5 2.1 -12.6 2.2 -6.2 Excise Duties 10.8 10.5 11.4 5.6 9.9 11.0 4.7 8.8 -11.0 9.9 0.4 Sales & Sevice Tax 5.4 27.7 22.0 304.1 26.8 28.3 2.2 27.9 4.1 30.0 11.9 Others 23.2 3.8 3.2 -86.4 2.2 3.6 -4.2 2.9 33.9 3.5 61.6 Non-Tax Revenue 51.1 83.8 81.6 59.7 70.6 51.2 -38.9 62.5 -11.4 61.5 -12.9 Licenses and Permits 8.8 8.7 15.6 76.1 6.7 15.2 74.2 8.1 19.9 8.0 18.9 Petroleum Royalty 5.2 5.8 5.6 7.3 4.2 5.3 -8.6 4.3 2.5 5.5 30.9 Inv Interest and Returns 31.9 60.1 59.5 86.7 46.1 28.6 -52.4 36.8 -20.2 37.0 -19.7 Others 5.2 5.3 0.9 -82.7 5.0 2.1 -59.4 13.3 163.5 11.0 117.9 Operating Expenditure 231.0 263.3 259.9 12.5 224.6 241.0 -8.5 236.5 5.3 248.9 10.8 Emolument 80.0 80.5 82.0 2.6 83.0 82.6 2.6 84.5 1.9 85.0 2.4 Pension & Gratuities 25.2 25.9 26.1 3.5 27.5 26.6 2.6 27.6 0.2 28.0 1.7 Debt Service Charges 30.5 32.9 33.1 8.5 34.5 34.9 6.1 39.0 13.1 39.0 13.1 Supplies & Services 35.3 31.5 29.1 -17.6 29.3 38.5 22.3 32.8 11.8 38.0 29.6 Subsidies 27.5 23.9 27.5 0.0 19.8 23.4 -2.1 18.9 -4.7 24.0 21.3 Asset Acquisition 0.4 0.8 0.7 50.6 0.6 0.7 -15.6 0.5 -14.2 0.5 -20.8 Grants & Transfers 30.9 66.0 59.7 93.2 28.9 39.2 -40.7 32.7 13.4 33.9 17.4 Other Expenditure 1.1 1.8 1.7 58.1 1.0 1.3 -28.4 0.5 -48.0 0.5 -48.0 Gross Development Expenditure 56.1 54.2 56.7 1.1 51.4 58.0 7.1 69.0 34.3 63.0 22.7 Defense 4.9 5.6 5.6 14.6 5.8 5.1 -9.4 7.8 34.5 6.6 14.2 Economic 36.1 31.3 31.7 -12.2 28.7 33.2 6.1 38.9 35.4 37.0 28.9 Social 12.9 14.5 15.7 21.7 13.8 15.9 9.5 18.4 32.8 16.0 15.8 General Admin 2.2 2.8 3.7 68.7 3.0 3.9 38.8 4.0 30.6 3.4 10.4 Covid-19 fund - - - - 38.0 38.0 - 17.0 -55.3 17.0 -55.3 OVERALL BALANCE -53.4 -51.5 -52.1 -2.4 -87.6 -51.7 0.4 -84.8 -3.2 -91.8 4.8 as % of GDP -3.7 -3.4 -3.4 - -6.2 -3.2 - -5.4 - -6.0 -

Source: Ministry of Finance (MOF), RHB Economics & Market Strategy

See important disclosures at the end of this report Market Dateline / PP 19489/05/2019 (035080) 11

Malaysia Chief Economist’s Insights 25 March 2021

Figure 17: RHB Development Spending forecasts

Development spending (RM mn) 2016 2017 2018 2019 2020E 2021F

General Government Development Expenditure 46,778 49,179 63,672 57,089 56,857 75,015

- of which Federal Government 41,995 44,883 56,095 54,173 51,360 63,000

Non-Financial Public Corporations (NFPC) 92,278 82,580 80,822 75,345 75,130 75,000

Total (Federal + NFPC) 134,273 127,464 136,917 129,518 126,490 138,000 Total (General + NFPC) 139,056 131,759 144,494 132,434 131,987 150,015

Source: Ministry of Finance (MoF), RHB Economics & Market Strategy

The general government sector in Malaysia comprises the federal government, state governments, local governments and federal statutory bodies The NFPCs are public sector agencies that are Government owned and/or Government-controlled companies.

See important disclosures at the end of this report Market Dateline / PP 19489/05/2019 (035080) 12

Malaysia Chief Economist’s Insights 25 March 2021

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