KUALA LUMPUR, Feb 26 — As the revised Budget 2023 remains moderately expansionary, Kenanga Research expects the debt level to increase slightly to 61.4 per cent of gross domestic product (GDP) for 2023 on an estimated fiscal deficit of RM95.0 billion and potentially slower economic growth.

Statutory debt will likely remain under the 65.0 per cent threshold, the research firm said in a note released on Saturday.

As of end-2022, the federal government’s debt was RM1,079.6 billion, which was 60.4 per cent of GDP.

Although its share of GDP was lower than in 2021, Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim emphasised in a Budget 2023 speech that it was still too high and needed to be reduced.

On the other hand, the Ministry of Finance (MoF) projects federal government debt to reach around 62.0 per cent of GDP, in order to finance development programmes and projects under the 12 Malaysia Plan as well as the redemption of the 1MDB bond maturing in March 2023.

The government needs to borrow to redeem the US$3.0 billion 10-year US dollar debt paper with a 4.44 per cent coupon per annum, it added.

The statutory debt, which includes Malaysian Government Securities (MGS), Government Investment Issues (GII), and Malaysian Islamic Treasury Bills (MITB), was at 57.7 per cent of GDP, which is well below the 65.0 per cent threshold set by the amended Act 830 (Temporary Measures for Government Financing).

Meanwhile, the research firm commends the revised Budget 2023 as a comprehensive effort to tackle the country’s pressing economic challenges while promoting greater social responsibility as well as fiscal accountability and transparency.

However, it reckons there will be challenges to reaching the lower deficit target of 3.2 per cent of GDP by 2025, given the delicate and highly uncertain economic environment post-pandemic.

"Nonetheless, we welcome the proposed presentation of the Fiscal Responsibility Bill later this year and think it reflects a commitment to ensuring long-term stability alongside sustained economic growth,” it said.

Medium-term projection has been revised, tax collection to improve revenue

Under the revised 2023-2025 Medium-Term Fiscal Framework (MTFF), real GDP growth is projected to moderate to 4.7 per cent (previous MTFF 2022-2024: 5.5%).

The firm said the latest revision also considers several policy measures and reform initiatives to rebuild a fiscal buffer and strengthen the government’s finance.

This is reflected in the increased projected revenue via non-petroleum and petroleum-related and the absence of Covid-19 funds.

Likewise, the fiscal deficit is targeted to average much lower at 4.1 per cent of GDP (2022-2024: -5.0 per cent), which signals that the government is pivoting towards fiscal consolidation by 2025.

"Nevertheless, we project the fiscal deficit in 2023 to narrow to 5.0 per cent in line with the government, considering the prospect of a global economic slowdown and the normalisation of domestic economic activities,” it said.

Meanwhile, tax collection is expected to be the primary source of revenue in 2023, with an anticipated increase of 4.6 per cent to RM218.3 billion, driven by a higher collection from direct tax (RM164.1 billion; 2022: RM153.5b) and partially offset by a slightly lower collection from indirect tax (RM54.1b; 2022: RM55.3 billion).

Consequently, the contribution of tax revenue to total revenue is expected to increase to 74.9 per cent (2022: 70.9 per cent).

"The anticipated improvement in domestic labour market condition and income prospects, coupled with the ongoing recovery in economic and social activities, are expected to contribute to higher tax revenue in 2023, in line with the government’s projection.

"Furthermore, the implementation of new taxes, government efforts to enhance tax compliance and higher taxes for the wealthy are likely to further boost tax revenue,” Kenanga Research said.

Growth outlook

MoF forecasts Malaysia’s economic growth to grow by 4.5 per cent in 2023 (2022: 8.7 per cent) — slightly below Kenanga Research’s forecast of 4.7 per cent,

The research firm said in line with the updated estimates and forecasts by the government, it has updated projections with a slightly lower adjustment on revenue and DE components, cognisant of the cautious outlook.

It said the revenue projection would be challenging to achieve amid the expected global economic slowdown narrative.

"At the same time, any delay in the implementation of big government projects and the prospect of renewed global supply chain disruptions may weigh on government spending and the progress of major projects,” Kenanga Research said. — Bernama