CONCERNS have been raised about how Malaysia plans to finance Budget 2021, recently passed by Parliament, after a sovereign-rating downgrade earlier this month.

“If the economy does not recover as strongly as the 6.5-7.5% the government is expecting, any revenue shortfall is likely to manifest” in lower tax revenue, Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore told Bloomberg.

The government is pinning its hopes on increased tax revenue to meet projections, banking on this bump coincide with the economy returning to normal.

This comes despite Finance Minister Tengku Zafrul Tengku Abdul Aziz revising his estimate on economic contraction, saying it would be “closer to 5.5%”, a full percentage point lower than previously.

On top of which, the country is only just emerging from the conditional movement recovery order, in place in a number of states since early October. According to the report, these curbs cost the economy RM300 million a day.

Nevertheless, despite some “speed bumps”, Maybank analysts expect national gross domestic product to increase 5.1% in 2021.

Falling oil revenue

The government’s dependence on oil revenues from Petronas – upon which it has relied since the previous Pakatan Harapan government zero-rated the deeply unpopular Goods and Services Tax in 2018 – will come back to bite Putrajaya, Bloomberg reports, after the price of crude dropped off a cliff earlier this year.

Analysts believe the government needs to diversify its revenue streams to stem the shortfall, 14% this year.

Tengku Zafrul has said that alternative taxation models are being reviewed but so far has been coy as to the details.

Nevertheless, analysts do not share Tengku Zafrul’s optimism, pointing to the combination of the Fitch Ratings downgrade and the possibility of a “smaller revenue footprint” contributing to increased pressure on the economy.

S&P’s long-term rating on Malaysia carries a negative outlook, while Moody’s has said the country is prone to volatile capital flows.

Despite this, the ringgit is strong and Bursa Malaysia has shown its best annual performance for three years. Coupled with the passing of the budget, investors appear willing to overlook economic problems for now. – December 21, 2020.