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A budget with broad-based, long-term implications

Tong Kooi Ong
Tong Kooi Ong • 7 min read
A budget with broad-based, long-term implications
SINGAPORE (Nov 12): Malaysia’s Budget 2019 was probably one of the most anticipated and closely watched in recent years. After all, it is the first budget from the newly installed Pakatan Harapan government. In the run-up, the government had warned tha
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SINGAPORE (Nov 12): Malaysia’s Budget 2019 was probably one of the most anticipated and closely watched in recent years. After all, it is the first budget from the newly installed Pakatan Harapan government. In the run-up, the government had warned that sacrifices were required in view of the country’s trillion-ringgit debt burden. That certainly had many bracing for the worst.

But as it turned out, Budget 2019 is more expansionary and far-sighted than one would have expected given the fiscal constraints.

Of note, the budget allocated some RM37 billion ($12.19 billion) for long-overdue tax refunds — Goods and Services Tax (RM19 billion) as well as outstanding income tax and Real Property Gains Tax refunds (RM18 billion).

These refunds amount to a fiscal boost — money paid back to companies can be reinvested and/or lower costs and selling prices, while individuals will see increased disposable incomes that could spur short-term consumption.

There were a slew of measures to improve the well-being of the struggling B40 (bottom 40% of households), including targeted subsidies (for petrol and electricity), a higher minimum wage, more cash assistance (under Bantuan Sara Hidup), insurance coverage, and subsidised home financing.

Given that lower-income households typically consume a high percentage of their disposable incomes, these allocations would also be expansionary for the economy.

Predictably, there was no big, splashy, new project. And there was tightening of government expenditure. The focus, though, was not so much on reducing the spending but to spend more effectively, by plugging leakages and wastages. By doing so, the government aims to generate a bigger bang for its buck.

Aside from the few mega infrastructure projects that have already been shelved or downsized, some RM19 billion worth of previously directly awarded contracts have been identified for review and renegotiations, with the minimum target of 10% cost savings.

Importantly, the fiscal discipline was balanced out by a more far-sighted approach — to shift the driver for economic growth from public (infrastructure) spending to broad-based private consumption and investments.

For instance, an open tendering process for all future government procurement would not only reduce costs but importantly, also foster “genuine” private business growth.

Infrastructure spending will boost economic growth, even if it involves just digging a hole in the ground or the construction of roads and bridges to nowhere. Economic growth can also be achieved by raising productivity and utilising existing assets more efficiently. The difference is that returns from the latter will get you a whole lot further.

Over the past few months, the government has made its intentions quite clear — to shift from reliance on infrastructure spending to improving productivity by harnessing digital technology.

It has already made the important first step towards digitalisation, by requiring service providers to reduce the cost and raise the speed of broadband and mobile internet access. Enhanced communications and high-speed connectivity are the building blocks towards a digital economy, which encompasses industry 4.0, e-commerce, cloud computing, innovative sharing-subscription business models and so on.

Budget 2019 reinforces the Malaysian government’s commitment with more initiatives supportive of this goal.

Various funds were announced — including the RM1 billion National Fiberisation and Connectivity Plan, RM3 billion Industrial Digitalisation Transformation Fund and RM2 billion in allocations for a business loan guarantee scheme for small and medium-sized enterprises — to facilitate and catalyse the digital transformation.

One of the major concerns is that future consumption growth will be constrained by Malaysia’s high household debt, which now stands at 84.3% and is among the highest in the region. The rising cost of living also means the national savings rate has been on a downtrend, from 38.8% in 2007 to 28.5% in 2017.

Recall we talked about how a high savings rate generates a pool of domestic capital that can be used to fund growth. This means the country is less dependent on foreign direct investments, and crucially, short-term portfolio money that can be destabilising for the economy.

Mortgage is the biggest reason behind the rise in household indebtedness, accounting for more than 54% of total household debt while vehicle financing accounts for another 20%. Unsurprisingly, housing and transport are the two biggest components in household expenditure, after food, accounting for a combined 38.4%.

In other words, if we can raise home ownership without taking on more debt and negate the need to own a car, we can significantly reduce household debt and expenditure. This would free up disposable income for discretionary consumption and/or savings-investments that would, in turn, underpin sustainable longer-term economic growth.

Hence, it was positive that Budget 2019 also included measures to directly address the issues of household debt and savings.

Allocations were made to fund a plan for unlimited monthly rail-bus passes for RM100. This would reduce costs for frequent users. Furthermore, the government is in talks with e-hailing operators to provide the crucial last mile solution. If all goes to plan, a seamless and affordable public transportation network will improve ridership and encourage the switch away from car ownership.

The Budget also introduced FundMyHome, a crowdfunding scheme that leverages digital technology. I will elaborate a bit on this scheme for obvious reasons. My vision is very simple — that is, to help Malaysians buy their first home.

As discussed previously, the biggest obstacle to homeownership is affordability. Income growth has lagged rising home prices, especially for quality housing of reasonable size, location, connectivity and amenities.

As a result, too many young Malaysians — drawing their first salaries with little savings — are unable to meet the criteria for a traditional mortgage. Many may have to resort to renting. But rental payments are essentially burnt and do not build savings. Even if one manages to qualify for a bank loan, high monthly debt servicing takes up a huge chunk of disposable income, leaving little left over for discretionary spending and savings.

Under the FundMyHome scheme, you can own a home by putting up just 20% of the purchase price with no further obligation for the next five years. Use this period to save what otherwise would have to be paid either as interest expense to the bank under a traditional mortgage, or rental. In effect, you start saving for your dream home while staying in it.

The Global Portfolio recouped some losses in the past one week, gaining 7.7%, bolstered by strong price recovery for Ausnutria Dairy Corp,, Alibaba Group Holding and Northrop Grumman. The gains pared losses since inception to 10.4%. Nevertheless, the portfolio is still underperforming the MSCI World Return index, which is up 0.7% over the same ­period.

Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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