BUDGET 2024, under the theme “Madani Economy: Empowering the People” is expected to focus on alleviating the cost-of-living pressures on middle income earners together with helping small and medium-sized enterprises (SMEs).

While inflation is slowing down and it’s expected the budget will focus on subsidy rationalisation and fiscal consolidation with the ultimate aim of deficit reduction, cash flow remains a critical and major issue for households and micro, small and medium-sized enterprises (SMEs). Cash flow is the remaining amount of cash available minus payment commitments such as debt/loans and other regular liabilities.

For SMEs, payment commitments extend to fixed overhead costs which encompasses management salaries, marketing/promotional materials, insurance, employers’ Employee Provident Fund (EPF) and Employee Insurance Scheme (EIS) contributions, Socso (social security), etc. and even increases in the minimum wage.

In addition, SMEs are affected by higher production costs due to ringgit depreciation and supply chain reconfigurations, higher “margins of safety” (borrower’s and lender’s risks), including user-costs of capital and uncertain expectations about the current economic/business environment which have resulted in vendors and suppliers cautious about extending credit lines.

This means that irrespective of profit margins, businesses saddled with fixed payment commitments suffer financial stress when revenue shrinks/declines and have to dip into their earnings.

The same is true for households where sustained cost-of-living pressures which affect the lower and middle-income groups the most as measured by the food and beverage groups and sub-groups as per Engel’s Law (the inverse of which is that consumption expenses rise with decreased/reduced income or otherwise loss of purchasing power).

According to the August 2023 Consumer Price Index (CPI) statistics by the Department of Statistic (DOSM), the food and non-alcoholic beverages group was at 5.1%, followed by the restaurants (and hotels) group at 4.7%. The “food at home” sub-category was at 2.9% with the food away from home sub-category at 5.9%

Rice, bread, and other cereals were at 4%, meat overall was at 5.8%, and milk, cheese, and eggs were at 4%. The only reprieve would be the fall or deflationary effect in relation to vegetables at -1.1 (as compared to the same month last year).

The “consecutive” Overnight Policy Rate (OPR) hikes by Bank Negara have squeezed the finances of households and SMEs, in addition to the scarring from the Covid-19 lockdowns.

The intention is to dampen demand but inflation has been supply-driven as shown by geopolitical conflicts  (Russia-Ukraine war affecting energy prices). This meant there’s no excess savings or reserves that would translate into excess spending power to begin with.

The purpose of dampening demand has come at the price of loss of purchasing power, instead, which co-exists with persistently inflationary prices of food essentials.

This means that any dampening of demand will not necessarily be in tandem with dampening of prices – resulting in a stagflation.

With SMEs, they account for 97.4% of all businesses in the country and employ up to 7.59 million people which is 48.2% of Malaysia’s total workforce. The figure would be higher if the informal sector is taken into account. SMEs generate 38.4% of country’s gross domestic product (GDP).

Persistent cash flow problems would lead to a slowdown in production and other forms of business activities at a macro-level as costs exceed revenue – since SMEs and, by extension, the economy are a complex of inter-connected balance sheets.

This could be accompanied by layoffs (to cut labour costs). For non-manufacturing SMEs like shop-lot operators, cash flow problems would result in closures as the remaining assets are sold off to fulfil residual payment commitments.

As it stands, SMEs are operating on a thin profit margin. The situation has been exacerbated by the TNB rate hike which started last year.

Thankfully, the Madani unity government has provided a RM5.2 billion electricity subsidy which will particularly help our SMEs tide through the rising costs. It’s hoped the budget will contain additional provisions for next year.

Whilst the withdrawal of subsidies for the multinational companies (MNCs), mid-tier companies (MTCs) and other corporations will also impact on their profit margins and earnings, they don’t suffer from cash flow issues – as derived from the trio of income (revenue), balance sheet and portfolio (capital assets – physical and financial) sources.

They are also in a position to spearhead the transition to green and renewable energy under the framework of the recently announced and much-lauded National Energy Transition Roadmap (NETR). Deployment of solar panels should be given especial attention since it’s cheaper and more cost-effective, comparatively (Why Malaysia should go for solar energy, Koon Yew Yin, Free Malaysia Today, October 8, 2023).

Towards that end, with the NETR in mind, it’s hoped that the Budget would contain tax incentives such as allowances to both corporations and SMEs – which are counterbalanced by the introduction of a multi-tiered corporate tax – to expedite the transition away from full or heavy reliance on conventionally-generated electricity.

This means that TNB needs to dip into the mix of debt-equity sources, including retained earnings which will be significantly eroded post-earnings before interest, taxes, depreciation and amortisation (EBITDA). The post-EBITDA includes tax and also the costs of the Imbalanced Cost Pass-Through (ICPT) mechanism under the Incentive Based Regulation (IBR) framework.

The re-powering of the Sultan Ismail Power Station using combined cycle gas turbine (CCGT) with hydrogen-ready technology alone would cost RM6.3 billion which is in excess of TNB’s 2022 net profit of RM3.46 billion. Borrowings will either have to come from a consortium of banks or debt issuance (Tenaga needs to borrow more amid tighter cash flow, The Edge Markets, July 12, 2022).

Now, the imposition of capital gains tax (CGT) on listed shares (Bursa Malaysia) under Budget 2024 would “incentivise” the deployment of part of the retained earnings towards productive use, among others, and (re)align and link the market valuation/price of financial assets with that of the physical assets (in relation to the liquidity preference) – and go a long way in encouraging the further accumulation of the net capital stock (NKS) as measured by the gross fixed capital formation (GFCF) – typically on a maximum of a 9-year repayment term for machinery/equipment – which remains below pre-Covid-19 levels (“Fixed-asset investments fall short”, The Star, July 26, 2023).

This would also apply to TNB in the areas of smaller scale projects such as leveraging on existing oil and gas (O&G) infrastructures to be repurposed – primarily to support the development of the renewable energy sector by transporting (green) hydrogen produced at sea back to shore (“Spearheading renewable energy development in Malaysia”, Jennifer Ley, EMIR Research, March 3, 2023).

In EMIR Research article, “A simulated or guided peg – neither soft nor hard” (August 8, 2023), it’s proposed that there should be a strategy to buffer corporate debt (denominated in the USD). Such corporate debt is a strategic necessity as a hedge against currency fluctuations – hedging the hedge.

This would envisage Bank Negara’s dynamic forex hedging programmes being opened up to corporate entities (i.e., non-institutional residents). It’s hoped that Budget 2024 would come up with the fiscal/tax incentives/allowances. Again, this would help our SMEs as they seek to increase their international market exposure.

In addition, the government should popularise the use of invoice factoring amongst SMEs as one market-based mechanism to mitigate against cash flow problems. Budget 2024 should provide that the use of these “discounted” notes could be off-set or deducted from the tax liability – as a form of additional/complementary tax “cut” for SMEs.

The State still and can play a vital role in managing market dynamics and the latest rice hoarding incident involving certain mid-stream players (non-Bernas) provides such an opportunity for further intervention in the form of profit (re)allocation based on the (re)configuration of the volume handled.

The government is already the price-setter which sets the floor price for mid-stream purchase of domestic upstream supply (including when it comes to being the buyer-of-last resort which is especially applicable to Bernas) alongside the ceiling price at the downstream level.

What the government can do is to compel all the non-Bernas cartel players to form a joint-venture (JV) or a consortium for the purpose of ensuring that the smaller players (as profit-takers as opposed to being profit-makers, i.e., the bigger players) will get their “fair share”. A JV will ensure that profits are (re)allocated according to the volume of rice sacks handled and based on the logistical routes determined as well as equity share of the participants.

On the Public Finance and Fiscal Responsibility Act that was passed on October 11, it’s judicious of the government not to include a provision on debt rollover as one of the pillars of the fiscal objectives – constituting an implicit recognition that the government budget isn’t like a household’s.

Focus should be on decreasing the debt service charges which requires coordination with Bank Negara – implementing a form of quantitative easing to lower the long-end of the term maturity structure to reduce yields.

Given that the World Bank has cut Malaysia’s GDP forecast to 3.9% which is dire given that the stock-flow consistent model of our national accounts relies on an export sector surplus, the budget should be flexible enough to increase deficit spending to mitigate cash flow problems in the economy. – October 14, 2023.

Jason Loh reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.