Malaysia's 2024 Budget: Who Are The Beneficiaries?

On 13th October 2023, the Malaysian government announced the Federal Budget for 2024. This marks the second fiscal budget released by the Unity Government and holds significant importance for both Malaysians and economic practitioners. The budget serves as an economic compass for Malaysia. The total allocation for this budget is RM393.8 billion, which demonstrates the government's commitment to fiscal reform. Based on budget trends since 2016, the overall impact on the FBM KLCI stock market index is generally negative after the budget announcement.

1.How will the process of enlarging the allocation, which represents economic growth, be achieved?
The proposed budget sets the economic growth target for 2024 at 4.0% to 5.0%, which matches Bloomberg's median expectation of 4.5%. Forecasts indicate moderate economic growth next year, primarily driven by the expansion of the service sector with expected growth in the construction, manufacturing, and agricultural sectors as well as recovery in the mining sector. Inflation is projected to remain within a manageable range, while the unemployment rate is expected to slightly decrease. Additionally, the Ministry of Finance has revised down its economic growth forecast for 2023 from 4.5% to 4.0%.

The proposed fiscal expenditure budget for 2024 is RM393.8 billion, making it the largest budget in Malaysian history with a 1.5% increase compared to the 2023 budget. Operating expenditure increased by 1.2% reaching RM303.8 billion, primarily due to increased allocations for salaries, debt servicing, pensions, supplies, and services. Development expenditure decreased by 7.2%, amounting to RM90.0 billion, with RM45.2 billion allocated for driving and supporting economic growth, particularly in the transportation sector.

By the end of 2024, the total federal government debt is expected to reach around 64.0% of GDP, remaining within a relatively manageable range. The target for the deficit-to-GDP share in 2024 is 4.3%, a decrease from the previous estimation of 5.0% in 2023. According to the rolling three-year Medium-Term Fiscal Framework (MTFF), the average ratio of the budget deficit to GDP during the period of 2024-2026 is projected to be 3.5%. This means that the ratio of the budget deficit to GDP is expected to further decline from 4.3% in 2024 to an average of 3.1% in 2025-2026.

The Ministry of Finance has implemented moderately expansionary fiscal policies aimed at achieving sustainable fiscal revenue. Tax reforms are expected to contribute to a 6.4% growth in government tax revenue, reaching RM243.6 billion, becoming the main driver of income growth. The key points of the tax reforms are as follows:1) Increase the service tax rate from 6.0% to 8.0%, and expand the tax base to include logistics, economy, and underwriting industries (excluding food, beverages, and communication services).2) Implement the Capital Gains Tax (CGT) on private companies.3) Impose a special tax of 5%-10% on high-value/luxury goods.4) Plan to implement a Global minimum tax (GMT) for companies with income not lower than EUR750.0 million.5) Introduce an electronic invoicing system for taxpayers with annual income exceeding RM100 million to strengthen compliance.

What are the budget highlights and which industries will benefit?
The 2024 fiscal budget is in line with the Malaysian government's recently announced medium to long-term economic, industrial, and policy frameworks, overall plans, and roadmaps. This includes the 12th Malaysia Plan Mid-Term Review (12MP MTR), New Industrial Master Plan (NIMP 2030), MADANI Economy, and National Energy Transition Roadmap (NETR). The policies and frameworks will influence the areas and industries that will mainly benefit from budget allocations and incentive measures. The budget highlights and the industries that will benefit from them are as follows:

1) The service tax rate has been increased from 6.0% to 8.0%, with an expanded tax base that includes logistics, economy, underwriting, and other industries (excluding food, beverages, and telecommunications).

2) Special taxes of 5%-10% are imposed on high-value/luxury goods.

3) Subsidies for chicken and eggs will be discontinued, and price controls will be lifted.

4) Rahmah Cash Contribution increased to RM10.0 billion from RM8.0 billion, benefiting 9 million people.

In the short term, the government's decision to remove subsidies for poultry products will improve the profitability of the farming industry. In the long term, the market will play a leading role. The government's cash subsidies will alleviate the financial burden on residents, but due to the increase in the service tax rate, the cost of living is expected to remain at its current level. Therefore, the consumer industry is not expected to experience significant upliftment.

1) An allocation of RM10 million will be provided to expand franchised trade to increase exports.

2) A matching grant of RM50 million will be given to support the Port Klang Authority to maintain Port Klang.

3) A matching grant of RM20 million will be provided to upgrade the Malaysia Single Window System (MMSW) in collaboration with the Port Authority.

4) The government will introduce a tax incentive for Global Business Services (GBS) centers, with a preferential income tax rate of 5%-10%.

5) An allocation of RM47 million will be made to improve infrastructure at Subang Airport.These initiatives aim to improve the efficiency of ports, attract more trade activities and exports, and enhance port infrastructure capabilities. This will create more business opportunities and economic growth prospects for the logistics industry.

1) An allocation of RM350 million will be provided to promote sales and tourism activities.

2) A grant of RM20 million will be allocated to state governments to maintain and protect tourist attractions.

3) An allocation of RM80 million will be made to preserve and protect heritage buildings and sites.

4) An allocation of RM20 million will be made to enhance and preserve the value of Kuala Lumpur as a creative and cultural city.

5) Improvements in visa policies and relaxation of conditions, among other measures, will be implemented.

6) Entertainment tax rates will be reduced.These measures aim to attract more tourists and are positive news for the tourism industry. They also encourage foreign tourists to visit and contribute to the local consumer market.

1) An allocation of RM510 million will be provided to the Ministry of Science, Technology, and Innovation, as well as the Ministry of Higher Education.

2) A grant of RM76 million will be allocated to strengthen research, development, commercialization, and innovation ecosystems.

3) An allocation of RM10 million will be provided to government-owned high-tech departments.

The government has allocated significant funds for research and development in the science, technology, and innovation sectors. However, no direct investment has been mentioned for the technology industry's related supply chain. The impact of the budget on the technology industry is expected to be limited in the short term, as the translation and commercialization of research achievements take time.

1) The government is providing RM2.4 billion to promote agricultural activities, improve the socioeconomics of smallholders, and support the development of plantations and commodity departments.

2) RM100 million is allocated for the palm tree replanting program, with a grant of RM70 million to enhance the sustainability of the palm oil industry.

3) RM400 million is allocated for rubber production incentives (IPG).

4) RM90 million is allocated to RISDA and FELCRA to encourage crop smallholders to optimize the process of crop and livestock production.

These measures aim to promote agricultural activities and enhance the income and development opportunities for crop smallholders. However, Malaysia has a planting area of 5.5 million hectares of oil palm trees, and many plantations are facing the issue of aging palm oil trees. These funds may not be sufficient to address these issues.

1) RM2 billion is allocated to the National Energy Transition Fund.

2) Financial institutions are providing access to financing of up to RM200 billion to encourage the energy industry's transition to a low-carbon economy.

3) The availability period for the Enterprise Green Energy Plan is extended, and Third-Party Access (TPA) is explored.

4) Encourage the installation of solar panels in residential buildings and reduce costs.

5) Solar panels are installed on government buildings' rooftops.

The Malaysian government is accelerating the national energy transition andstrongly supporting the clean energy industry and encouraging more companies to join the carbon market. Eligible companies are given additional tax exemptions of up to RM300,000. This is good news for the clean energy industry, such as photovoltaics.

1) The tax exemption for EV charging facilities will be extended for an additional 4 years, with a maximum of up to RM2,500.

2) The tax incentive for electric car leasing will be extended for another 2 years.

3) A new rebate program for electric motorcycles will be introduced, with a maximum rebate of up to RM2,400.

4) Tenaga Nasional, GENTARI, and Tesla will invest over RM170 million to build 180 electric vehicle charging stations in Malaysia.

Policy support plays a crucial role in the development of the electric vehicle market. However, currently, electric vehicles in Malaysia do not have a price advantage compared to fuel-powered cars, and infrastructure such as charging stations lags behind other Southeast Asian countries. In the short term, the stimulating effect on this market may not be significant.