Budget to boost domestic consumption

Written by Chong Jin Hun
Friday, 23 October 2009 11:10

KUALA LUMPUR: Budget 2010 to be unveiled today may put more disposable income into the man-in-the-street’s pocket, a move deemed crucial to sustain domestic consumption to mitigate the effects of slower external trade on the country’s economy, AmResearch Sdn Bhd senior economist Manokaran Mottain said.

The economist said lawmakers could initiate a personal income tax reduction, and raise civil servants’ salaries.

“I only see possible reduction in personal tax. Maybe civil servants’ salaries will be adjusted upwards to give consumption a boost,” Manokaran told The Edge Financial Daily in an interview. Manokaran who drew examples from major emerging economies like China and India, said in times of economic difficulties, these export-oriented countries had remained resilient because they had emphasised on domestic demand to sustain their economies.

In Malaysia, a total of RM207.9 billion was allocated under Budget 2009, up 5.1% from a year earlier. Of the RM207.9 billion, RM154.2 billion and RM53.7 billion were earmarked for operating and development expenditures, respectively.

The country’s rising budget deficit will be closely watched. Manokaran said despite the government’s effort to trim expenditures, the deficit was expected to rise to 7.8% of gross domestic product (GDP) this year, surpassing policymakers’ projected figure of 7.6%.

“I think they will have to slash the operational expenditures like subsidy,” said Manokaran, who feels that the disbursement of stimulus package funds “can be faster”.

For now, the general view is that the country will likely register its first GDP contraction this year since the regional financial crisis in 1998.

Manokaran. Photo by Mohd Izwan Mohd Nazam

This is in anticipation that GDP in the third quarter of 2009 will continue to shrink against the backdrop of a still-weak global platform, following two consecutive quarters of negative growth. The government initiated two economic stimulus packages with a combined value of RM67 billion to boost domestic demand against a landscape of falling exports.

Of the RM67 billion, the initial portion of RM7 billion is understood to have been almost fully utilised, according to Manokaran. Of the RM15 billion worth of fiscal injections under the subsequent RM60 billion portion, it is estimated that up to RM4 billion have been disbursed so far.

To reduce the cost of funds, Bank Negara Malaysia had slashed the overnight policy rate by a combined 150 basis points since November last year, but has kept it at 2% at its four previous Monetary Policy Committee meetings in April, May, July and August this year.

Meanwhile, Maybank Investment Bank Bhd said the Malaysian real estate investment trust (M-REIT) sector was worth noting.

In a note to clients, its analyst Ong Chee Ting said fresh incentives for Islamic REITs were possible in line with the country’s intention to become a hub for Islamic capital markets.

“After speaking to players in the property sector on their wish list for Budget 2010 and analysing them, we think the REIT sector, especially the Islamic REITs, is a potential beneficiary.

“By extending similar tax incentives to corporate investors, KLCC PROPERTY HOLDINGS BHD [], SUNWAY CITY BHD [] and IGB CORPORATION BHD [] may be enticed to list their crown jewels in Malaysia, adding depth, size and liquidity to the M-REIT sector,” Ong said.


This article appeared in The Edge Financial Daily, October 23, 2009.