Support for construction, supply-chain shifts in Malaysia's Budget

MALAYSIA'S Budget 2020, presented on Oct 11, is expected to provide boosts to the construction sector and export-oriented manufacturing in particular, said economists.

Those sectors were among the Budget's key focus areas, alongside others such as digitalisation, tourism, and green energy.

Despite its expansionary stance, however, the Budget's fiscal impact might be weaker than hoped. DBS economist Irvin Seah noted that its 8.1 per cent reduction in operating expenditure could partially offset the 4.6 per cent increase in development expenditure: "As a result, net fiscal impact on economic growth could fall marginally short of expectation."

There might be a need for monetary easing in order to reach the 4.8 per cent growth target for 2020, he added. DBS expects another 25 basis points cut by the central bank by mid-2020.

In an Oct 14 note, Fitch Solutions Macro Research said the Budget is expected to support the growth of Malaysia's construction sector in the short term.

"Rural Malaysia will be the biggest winner, with strong financial support for many projects in regions such as Sabah and Sarawak," it said. Over RM580 million was allocated to rural water projects, with about 80 per cent going to projects in Sabah and Sarawak.

Another RM443 million was allocated to flood mitigation projects, and RM150 million to the maintenance of exsting flood retention ponds. Such anti-flood infrastructure spending is expected to continue over the next decade, said Fitch Solutions.

Road projects such as the Pan Borneo Highway are also expected to proceed more smoothly with government support.

"However, attracting private capital through public-private partnerships will remain a challenge to the government and we will watch for developments in the PPP space that could boost the growth of the infrastructure sector," said Fitch Solutions.

Besides sector-specific pro-growth measures, Budget 2020 also included provisions "to cement Malaysia's position as a key destination for high-value-added FDI (foreign direct investment) resulting from supply-chain shifts to Asean", said Citi economists Kit Wei Zheng and Ang Kai Wei.

While Malaysia has the advantages of export similarity and low production costs compared with China, "trade diversion benefits have been limited by capacity constraints, such that diverted orders went to producers with spare capacity, such as those in Taiwan, Vietnam or Philippines", observed the Citi economists.

"For example, despite gaining US import market share in specific items within the tariff list such as semiconductors and vacuum cleaners, Malaysia did not see import market share gains for the US$250 billion tariff list as a whole."

Malaysia will only be able to benefit from supply-chain shifts after it adds capacity, allowing it to seize diverted export orders, they concluded. Budget 2020 thus included measures targeted at facilitating approvals for selected groups of investors, and expediting the conversion from investment approvals to realisation.

These include a new National Committee on Investment to overcome delays in approving investments; a new incentive framework to be introduced by Jan 1, 2021; and a special channel to attract investments from China.