The Federal Budget 2021 was unveiled at a period where prolonged uncertainties from the impact of the Covid-19 pandemic continue to threaten global economic growth. As expected, the Government tabled an expansionary budget with the aim to assist the rakyat during this virus-ravaged economic period and to avoid a humanitarian crisis in the country. ICMR would like to acknowledge that at the time of writing, the Budget has yet to be passed by the Dewan Rakyat and there is still debate on certain elements of the Budget. Despite this, the views presented here are based on the tabled Budget 2021 on 6 November 2020 by Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz. With its biggest-ever budget of RM322.5 billion, the government foresees an optimistic recovery between 6.5% to 7.5% Gross Domestic Product (GDP) growth in the coming year after an estimated contraction of 4.5% GDP in 2020 mainly attributed to the low base-year effect. Although the government’s forecast figure is in line with the recent IMF growth projection for Malaysia for 2021, the emergence of new Covid-19 waves globally would add further downside risks not only to the IMF forecast but also to our government’s forecast, especially with prolonged restrictions on the mobility of the people.
Economic recovery in 2021 hinges on a potential vaccine for the pandemic, global economic recovery and a rebound in domestic demand mainly dependent on significant fiscal support by the government. Fiscal deficit is estimated at 6.0% and 5.4% in 2020 and 2021 respectively, leading to a further increase in government debt, which has already surpassed 60% of GDP in 2020. The current trend of higher government debt, however, is something that has been observed globally and is not specific to Malaysia. Nonetheless, the government needs to be cautious in its handling of the current debt position, as it is one of the highest among its rating peers. Despite calls from various parties for rating agencies to consider public and private sector constraints in managing the Covid-19 pandemic before making a rating action, there was a global spike in the number of ratings being downgraded in the first half of 2020. A report by the Fitch rating agency stated that within the first eight months of this year, there were already 36 sovereign downgrades and 44 sovereigns put on “negative” outlook, a record high both in absolute terms and as a share of the rated portfolio[1].The critics equate the potential risks of this rush to downgrade with the 2008 financial crisis when ratings came tumbling down, causing a magnified sense of alarm particularly in markets for securitised products which led to systemic risks to the economy. Currently, the S&P and Fitch ratings have put Malaysia under negative watch. While we hope the rating agencies would make objective assessments of how the Malaysian government has successfully managed the Covid-19 pandemic prior to making any rating decision, we would caution that a downgrade could potentially undermine the domestic financial and capital market stability given that the foreign shareholding of Malaysian Government Securities and Government Investment Issues remain sizeable at RM195.7 billion (Oct 2020), equivalent to 24.5% (although it has dropped from a high of 36% in October 2016) of the total share.
Amidst the fiscal constraints, the government has attempted to table a budget that protects live and livelihoods whilst spurring economic growth. Various incentives and assistances were announced in the budget to protect low-income households, workers and Micro, Small, Medium Enterprise (MSME) – a continuation to the slews of fiscal stimulus announced earlier. A broad-based recovery in the supply and demand side of the economy is expected in 2021. The services and manufacturing sector are both projected to expand by 7% respectively supported by strong domestic and external demand. The agricultural, construction and mining sectors are expected to return to positive growth of 4.7%, 13.9% and 4.1% respectively in 2021. Crude oil prices remain crucial to our economic growth and fiscal position. The global crude oil prices slumped to a record low on 21st April 2020 after storage facilities filled rapidly due to Covid-19 pandemic lockdown. The Brent crude oil prices has recovered since then and currently hovers between US$35 to US$45 per barrel. For the medium-term fiscal framework between 2021 to 2023, the government is targeting fiscal deficit average at 4.5% of GDP with crude oil price forecast between US$45 and US$55 per barrel. Unemployment rate is expected to improve to 3.5% in 2021, which is closer to Malaysia’s long-term unemployment rate compared to 4.2% estimated in 2020. Meanwhile, the current account balance is likely to remain positive at 1.3% of GDP in 2021.
While the government presents optimistic expectations for economic growth in 2021, we remain cautious on potential downside risks to the forecast. The uncertainties from the impact of the pandemic remain significant and the structural disruptions to the economy, for example on the labour market, will only be observable in the medium-term. Here, we discuss four (4) key areas based on our previous research as well as our research pipeline, given our focus on identifying emerging and structural trends which can impact overall capital market development.
Empowering the rakyat to manage the impact of COVID-19 amidst a changing economy
Budget 2021 focuses on dealing with the unprecedented nature of Covid-19 and its impact on the rakyat. In line with this, the Employees Provident Fund (EPF) has announced the introduction of i-Sinar, where affected contributors can withdraw from their Account 1 up to RM9,000 or 10% of their savings, depending on their respective Account 1 balance. This complements the i-Lestari withdrawal facility for Account 2, introduced in April 2020, which has benefitted 4.7 million members with a total value of RM11.6 billion.
Focus was also placed on enhancing social protection. As insurance has a low penetration rate in Malaysia and it is among the factors that undermine financial security for individuals and families, EPF will allow members to make withdrawals from EPF Account 2 to purchase insurance and takaful products that are approved by EPF relating to life and critical illnesses coverage for themselves and their family. Additionally, to further encourage old-age savings, individual income tax relief of up to RM3,000 on Private Retirement Scheme (PRS) contributions will be extended until the year of assessment 2025.
What these announcements have reiterated is that for many Malaysians, their EPF savings remain their main or sole source of savings. While retirement savings should ideally be earmarked and separated from emergency funds, the need to allow withdrawals from EPF’s Account 1 highlights that the current social protection system and individual savings levels are inadequate in times of personal crisis. This is in line with Bank Negara Malaysia’s findings that 52% of Malaysians would face difficulty in raising RM1,000 immediately in the event of an emergency, and that 76% would not be able to sustain themselves for more than three months.[2]
Perhaps more worrying is the question of whether these announcements will benefit those who need it the most. As highlighted in our report, “Rethinking Long-Term Savings for Greater Financial Inclusion in a Changing Economy”, up to 62% of the total working age population may not be covered by EPF, and there has been relatively low take-up of voluntary schemes such as EPF’s i-Saraan and i-Suri as well as PRS. This number includes small business owners, the self-employed, freelance and informal workers, many of whom have been severely affected by Covid-19’s economic impact. This segment not only remains uncovered by any long-term retirement scheme, it also does not stand to benefit from the short-term relief afforded by the EPF withdrawal announcement.
Even though it can be argued that the nature of Covid-19’s economic impact is unprecedented and thus requires rethinking immediate priorities, EPF has rightfully stated that there should be a balance between the needs of members to address current challenges while ensuring their retirement savings for future wellbeing.[3] Further, impending structural shifts also mean that we need to start preparing ourselves for the future. Under the current system, the number of people not covered by EPF or any other retirement scheme is only expected to grow with the rise in gig economy and the changing nature of work in the future. While it appears that the government is cognisant of the importance of upskilling to remain relevant in a changing economy (RM1 billion was allocated for various reskilling and upskilling programmes in the Budget), the discussion needs to be widened to include the ways in which social protection should evolve in accordance with new norms. As discussed in our report, the nature of retirement savings will be impacted by longer lifespans and changing demographics, the rise of gig work, increasing fluidity between different modes of employment, and a shift beyond the traditional “hard-stop” retirement into a more multi-stage life.
These unprecedented times require bold and innovative solutions that can address both short-term needs while also preparing for a changing future. In thinking of how to address the need for long-term savings, we have recommended a two-pronged approach to adapt the current system for evolving needs, while also taking into account longer-term structural changes. Under the former, there is a need to focus on increasing participation and building savings as a habit by leveraging on insights from behavioural economics and usage of digital tools to make retirement savings more convenient, affordable and flexible.
This needs to be complemented by longer-term systemic change where retirement savings can be linked to all forms of income (as opposed to jobs), be it via formal employment, informal/self-employment, or a combination of both. This includes greater harmonisation across the various schemes through mandating and syncing tax, pension and social security enrolment to ensure comprehensive coverage for all Malaysians and enable centralised data collection to facilitate income-based incentives and assist in the design of appropriate policies and products. This should be complemented by a single portal where users can have a better overview of their taxes, pensions and other social security benefits. It may also be an opportune time for the Malaysian Social Protection Council to consider coordinated implementation of an overarching social protection framework, which could include universal flat-rate pensions – a basic pension for all Malaysians above a certain age that would address coverage issues and also guarantee a minimum standard of living and protection for all older people.
Enhancing access to financing for MSMEs to move towards “Malaysia 5.0”
ECF and P2P platforms are now more widely accepted as a fundraising channel, with more than RM 1 billion total funds raised benefitting more than 2,500 MSMEs. As such, to encourage more individual investors to take part, income tax exemption of 50% of the investment amount or limited to RM50,000 was accorded. The government had also provided in Budget 2019 and 2020, RM50 million each year for the Malaysia Co-Investment Fund, administered by the SC, to co-invest on a matching basis with the crowd in either an ECF or P2P campaign. This year the government is allocating a larger budget of RM 30 million in matching grants for ECF and RM 50 million for P2P –a clear signal that it is imperative for capital markets to move toward a more “democratised model” to increase access to investments and to promote more SMEs/entrepreneurship.
Based on the OECD publication, “Financing SMEs and Entrepreneurs 2020: An OECD Scoreboard”, SMEs are turning to non-bank financing sources at a faster pace than in the past. Online alternative finance markets for businesses, particularly leasing and hire purchases have increased significantly over the last couple of years, especially in China, United Kingdom, United States and Kazakhstan. It is therefore critical that SC provides more alternative fundraising avenues for the technology space, particularly blockchain related start-ups, using digital assets through Initial Exchange Offerings. The increasing demand for financing, coupled with a matured investor base for the ECF/P2P industry indicates the need for the Malaysian capital market to address the funding gap for growth stage start-ups in Malaysia and confront challenges in relation to moving towards “Malaysia 5.0”— a concept similar to Japan’s “Society 5.0” – that can contribute to a more sustainable and circular economy through the Fourth Industrial Revolution (IR 4.0) tools such as fintech, blockchain and artificial intelligence (AI).
Our earlier research on the venture capital industry in the report “Catalysing the Growth of Venture Capital: Malaysia’s Perspective” emphasised that today’s venture capital industry is a global one on many levels. However, Malaysia’s venture capital landscape lags behind some of its ASEAN peers and is in need of greater private and foreign sector participation. It is also important to ensure that the government’s role in the supply-side funding ecosystem is closely integrated with demand side policies in order to stimulate a more vibrant entrepreneurial sector. This would mean that policy implementation toward entrepreneurship would require close collaboration and coordination across different agencies and ministries.
Strengthening Malaysia’s Islamic Finance industry through greater innovation and digitalisation
Budget 2021 also emphasises the role of wakafs as part of the government’s inclusive agenda, through collaboration between Yayasan Wakaf Malaysia with Federal Government agencies, GLCs and GLIC. A National Wakaf Masterplan will also be created to ensure a more efficient endowment management to maximise the mobilization of future endowment assets. In addition, PNB will introduce wakaf services to all ASNB unit trust holders. In line with this, the SC launched a new framework to facilitate the offering of Islamic funds with waqf features to enable the growth of the Islamic social finance segment.The Waqf-featured fund framework will broaden the range of innovative Islamic capital market products and provide the public with access to Islamic funds that allocate whole or part of the fund’s returns towards socially impactful activities via waqf. These measures will further strengthen Malaysia’s leadership role in Islamic Finance.
A further opportunity space exists for enhancing the role of Islamic Finance in driving further financial inclusion through increased focus on digitalisation and FinTech. This would be in alignment with Budget 2021’s focus on innovation and digitalisation, through various initiatives announced such as Bank Negara Malaysia providing a RM500 million High Technology Fund to support high technology and innovative companies and the RM1 billion as special incentive package to support research and development (R&D) activities in high value-added technology. Our earlier report “Insights on Covid-19: Lessons during Difficult Times and What’s on the Horizon” highlighted that Covid-19 is likely to catalyse more prolific usage of transformative technological applications in the financial sector and that there is a need to facilitate a temporary period of “knowledge leapfrogging” through smart partnerships across different sectors and research institutions providing local knowledge transfer to further accelerate applications of AI and data analytics. One of the key challenges is that Malaysia is currently facing a shortage of talent in key technological areas relevant to FinTech such as blockchain applications, machine learning and data analytics.
The Islamic Finance Industry holds much promise, with assets expected to reach $3.9 trillion by 2023 according to Thomson Reuters.[4] However, the Islamic FinTech ecosystem in Malaysia is relatively nascent, despite having the potential to reap the same efficiency gains from technological applications as conventional finance. According to a recent country report by IMF on “Fintech in Malaysia”[5], while fintech developments are rapidly changing the financial sector landscape, Islamic FinTech is still in its infancy in Malaysia with only a handful of start-ups compared to the proliferation of Islamic FinTech in Indonesia.[6]
In Malaysia, fintechs can accelerate the transformative potential of Islamic Finance to drive further financial inclusion opportunities and promote key Islamic Finance principles such as transparency through technologies such as blockchain. An example of this is the Finterra WAQF Chain platform which combines the concepts and technologies of blockchain, Wakaf, and crowdfunding to reengineer Wakaf through technology, and further contribute to socio-economic development.
In a future which is increasingly driven by greater digitalisation, Malaysia’s private sector will benefit from leveraging on our economy’s demographics and size to drive more technology “test-hub” initiatives and to take an active role by adopting a “problem-first” approach to solving local problems, such as through Wakaf, which can be scaled up for regional applications through technology.
Harnessing long-term development through sustainable finance
The government will be issuing its first Sustainability Bond in Malaysia for environmental and social initiatives in 2021. This bond will complement the government’s first digital sukuk online, Sukuk Prihatin, a social bond meant to channel proceeds to sectors deeply affected by the pandemic. The Sukuk Prihatin was oversubscribed – surpassing its initial target issuance size of RM500mil. In response to the encouraging demand from eligible subscribers, the government has increased the size of issuance by an additional RM166mil.[7] Should Malaysia’s first Sustainability Bond follow the footsteps of Sukuk Prihatin, there could be encouraging demand for the Sustainability Bond which could spur environmental and social initiatives in Malaysia.
The announcement of the continuation of the Green Technology Financing Scheme (GTFS) 3.0 recognises the need to accelerate the move to a greener and more sustainable economy. GTFS 3.0 was allocated a fund size of RM 2 billion up to 2022 and will be guaranteed by Danajamin to encourage the issuance of Sustainable and Responsible Investment (SRI) sukuk. The Green Technology Financing Scheme was implemented from 2010 – 2017 to encourage local companies and entrepreneurs to be involved in green technology-based projects to support the growth of green technology in Malaysia in six main sectors – energy, waste, water, building, transport and manufacturing. When GTFS 2.0 was introduced in 2018, the government offered support in the form of up to 60% government guarantee as well as a 2% per annum interest/profit rate subsidy on loans for the financing of green technology development.[8] This is aligned to the nations’ goal of achieving clean energy transition target of 20% renewable energy by 2025. GTFS 2.0 has received encouraging response from the private sector, however the development of solar energy may not be seen for another few years as the gestation period for a large scale solar energy project can take up to 6 years or more.
The government has also extended existing income tax exemptions for SRI green sukuk for all types of sukuk and bonds until 2025 as a means of encouraging the issuance of SRI products and bonds. Green sukuk issuance is a relatively new segment of the sukuk market, introduced in 2017, and thus still represents a small percentage of total issuances in Malaysia.
The move towards harnessing the financial markets for the benefit of the people be it in a social or environmental context is noble, however, other aspects should be considered. Proponents of green technology have sought to expand the eligibility of GTFS to residential owners (with a lowering of processing fees for individuals), as GTFS 2.0 is currently only available to companies. As the issuances of green bonds in Malaysia have been limited (10 issuances totalling RM6.2 billion), there may be a need to consider “transition bonds” as an option to facilitate Malaysia’s still resource-heavy industries to move to a low-carbon economy and to build the pipeline for green bonds. Malaysia’s efforts to mitigate the impact of Covid-19 through the usage of social bonds shows that in times of crisis, all stakeholders, including investors can come together to fight towards a common cause, provided that funds are being allocated to the appropriate channels.
Also over the last few years, the government has adopted a gradual approach to introducing Sustainable Development Goals (SDG) commitments in the national budget – a positive start in line with the government’s commitment to the 2030 Agenda for SDG and the mid-term review of the 11th Malaysian Plan. Moving forward, there is a need to further integrate SDG targets into the national budget, with the design and plan for more flexible and agile integration efforts, either by conducting a qualitative report on the budgetary contribution or by mapping the national budget against the SDG gaps. The Economic Outlook 2021 published by the Ministry of Finance (MoF) had presented a box article on the government initiatives in mapping the SDG targets into the national budget. The article points out the challenge in ex post mapping of development expenditure to respective SDGs and aims to start budgetary process with ex ante approach. We believe the changes in the budgetary process to incorporate the ex ante mapping will allow for a more holistic approach of evaluating development expenditure which is in line with Malaysia’s aspirations to achieve SDG goals. For example, with the ex ante approach, infrastructure development by the public sector will incorporate sustainable factors at the pre-budget level which can better minimise negative externalities and improve the project delivery with enhanced positive impact. This information will improve private sector participation in financing for green development. The mapping of budget allocation based on SDG targets is pivotal to addressing the distribution of resources efficiently to achieve all 17 SDG targets simultaneously.
Conclusion
Formulating the Budget 2021 is a challenging task for most countries globally, given the unprecedented uncertainties surrounding the economic outlook due to Covid-19 and the already massive fiscal spending in the face of the pandemic. In Malaysia, this is further compounded by the sharp decline in oil prices due to the Covid-19 lockdown. Malaysia’s Federal Budget 2021 has put forth various measures to enhance the rakyat’s wellbeing, ensure business continuity and build economic resilience, while taking into account the government’s fiscal space for continued spending.
This note recognises the government’s efforts given this extremely challenging task in an unprecedented situation. Our views summarise the need for policies to consider the mid-to-longer term implications, beyond the short-term Covid-19 priorities, of a fast changing global economy. Transitioning to a “new normal” post-Covid-19 world would need greater private sector participation and various market-based interventions to complement the government’s efforts in dealing with the impending structural shifts. We discussed four key areas, based on our previous research as well as our research pipeline, given our focus on identifying emerging and structural trends which can impact overall capital market development. First, the need to address the spillover effects on longer-term savings, given the rise in the gig economy and the changing nature of work in the future. Second, the need to enhance more market-based financing for smaller businesses – and thus, also facilitate a virtuous cycle – of embracing greater IR 4.0 tools such as fintech, blockchain and AI. Third, leveraging on digitalisation for further growth in the Islamic Finance space which has the most promising potential to drive financial inclusion opportunities, and fourth, further harnessing capital markets for long-term sustainable development for the benefit of the people be it in a social or environmental context.
In line with this, efforts must also be focused on building the supporting ecosystems in each of these areas in order to facilitate the delivery of the intended outcomes.
References
[1] Fitch Ratings (2020), “Coronavirus Sovereign Rating Shock Subsides, Prolonged Stress Ahead,” available online at https://www.fitchratings.com/research/sovereigns/coronavirus-sovereign-rating-shock-subsides-prolonged-stress-ahead-25-08-2020
[2] Bank Negara Malaysia (2019) “Financial Stability and Payment Systems Report 2019,” available online at https://www.bnm.gov.my/ar2019/
[3] EPF (2020), “Improved Account 1 Facility Being Developed, available online at https://www.kwsp.gov.my/-/improved-account-1-facility-being-developed
[4] Thomson Reuter (2018), “State of the Global Islamic Economy Report, 2018/19,” available online at https://haladinar.io/hdn/doc/report2018.pdf
[5] International Monetary Fund (2020), “Selected Issues: Fintech in Malaysia”, available online at https://www.imf.org/~/media/Files/Publications/CR/2020/English/1MYSEA2020002.ashx
[6] Dinar Standard (2018), “Islamic Fintech Report 2018,” available online at https://www.dinarstandard.com/wp-content/uploads/2018/12/Islamic-Fintech-Report-2018.pdf
[7] “Sukuk Prihatin oversubscribed, demand hitting RM666mil,” The Star (September 2020), available online at https://www.thestar.com.my/business/business-news/2020/09/21/sukuk-prihatin-oversubscribed-demand-hitting-rm666mil
[8] Green Tech Malyaysia, “Features of GTFS 2.0,” available online at https://www.gtfs.my/page/features-gtfs-20
