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 Malaysia 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 See important disclosures at the end of this report Market Dateline / PP 19489/05/2019 (035080) 1 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 See important disclosures at the end of this report Market Dateline / PP 19489/05/2019 (035080) 2 Malaysia Chief Economist’s Insights 25 March 2021 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 Sabah 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 Sandakan Airport No information on 0.18 5-2021 expansion tenders Source: Various industry sources * privately funded ** State Government project See important disclosures at the end of this report Market Dateline / PP 19489/05/2019 (035080) 3 Malaysia Chief Economist’s Insights 25 March 2021 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) Sepanggar 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 Tawau 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 See important disclosures at the end of this report Market Dateline / PP 19489/05/2019 (035080) 4 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.