The recently tabled 2009 Budget addresses the need to increase disposable income of the people as purchasing power has been diminishing amidst rising prices of goods and services since the steep increases in retail fuel prices on June 5. Concerns, however, hinge on whether these measures are sufficient to help the country endure a global downturn and on the high 4.8% budget deficit for this year and 3.6% next year.

Malaysia Prime Minister Dato’ Seri Abdullah Ahmad Badawi tabled it on August 29. Calling it a “Caring Budget”, Abdullah, also the Finance Minister, proposed an allocation of RM207.9 billion, 5.1% higher than the revised for 2008. Operating expenditure takes up RM154.2 billion 74.2% with the remaining for development.

Capital Markets Incentives

Bursa Malaysia’s wish list had a few items come true.

• Tax exempt on fees received by domestic intermediaries that successfully list foreign companies and foreign investment products on Bursa Malaysia – the addition of foreign companies to the local bourse would significantly add to its credibility as a financial centre.
• Reducing tax rates on dividends received by foreign institutional and individual investors from Real Estate Investment Trusts (REITs) from 20% and 15% respectively to 10%.
• Fees from non-ringgit sukuk issued in Malaysia and distributed abroad will be tax-exempt, under the Budget proposal. Income tax will also be exempted on profits from trading of non-ringgit sukuk for 2009-2011.

In addition, venture capital companies that invest at least 30% of their funds in start-up, early stage financing or seed capital will get a five-year tax exemption.

Agriculture

Observers were surprised that no proposals were tabled on bio-fuel policy and adjustment to the threshold level for windfall tax on crude palm oil (CPO), currently at RM2,000 per tonne.

Nevertheless, the fisheries industry gets a RM300m allocation while RM1b will be channelled to padi farmers to increase production. Duty on fertilisers and pesticides will also be abolished.

Food security is addressed by several proposals, such as a RM5.6b under the National Food Security Policy from 2008 to 2010 to provide incentives to agriculture entrepreneurs to reduce production costs and encourage higher agriculture output.
Energy Alternative

In line with environment conservation, the government has proposed to exempt import duty and sales tax on photovoltaic system equipment and intermediate goods such as High Efficiency Motors and insulation materials. It will also exempt sales tax on locally manufactured solar heating system equipment and energy-efficient consumer goods such as air-conditioners, fans, lighting, refrigerators and televisions.

This essentially makes electrical items cheaper for consumers. However, as a national energy plan, it falls to find and develop alternative sources of energy that can reduce our dependence on oil and coal. The high cost of CPO (following crude oil prices and a global shortage of vegetable oils) has put a damper on its use as a biofuel.

Consumer Items

To address high cost of living, the government proposed reducing import duties on various consumer durables such as blenders, electric kettles, microwave ovens and rice cookers, from between 10% and 60% to 5% and 30%. Import duty on various food items such as biscuit, canned sweet corn, fruit juice and vermicelli will be fully exempted under the Budget. However, both measures do not contribute to domestic manufacturers and only serve to increase our imports and cash outflow.

Prices of essential food items, such as rice, eggs, sugar, flour, fish, poultry and meat are not affected by these proposals.

Automobile

Hybrid cars are given priority in Malaysia, given the high cost of petrol and concerns over global warming. The government will grant franchise importers 100% exemption on import duty and 50% on excise duty for new hybrid cars below 2000cc. This will last two years until such cars can be assembled locally.

The government also proposed to lower road tax for diesel-powered vehicles to match that of petrol-powered vehicles, effective September 1, 2008. This is sensible given that retail diesel price is now at par with petrol. While this may marginally reduce cost of transportation, one may see return of the interests in diesel powered passenger vehicles, considering the perceived better durability of such an engine.

Transport

A whopping RM35b will be spent from 2009 to 2014 to improve public transportation. However, only the Klang Valley’s LRT system and KTM Komuter services were specifically mentioned as beneficiaries. The LRT system will be extended by a total of 30km into Subang Jaya-USJ and Kinrara-Puchong. A new LRT line will be added from Kota Damansara to Cheras by 2014. KTM will get an allocation to rehabilitate and to acquire new Electric Multiple Units.

No mention was made on public transport systems in other parts of the country, such as Pulau Pinang, where traffic congestion and poor public transport can also be found.

Demand for properties in new areas earmarked for the LRT System and KTM Komuter extensions may increase over the longer term.

Property

Home buyers will take heart that the government proposed to grant a 50% stamp duty exemption on loan agreements for medium-cost houses of up to RM250,000, on top of the existing 50% stamp duty exemption on the instrument of transfer.

Civil servants will also benefit as the government housing loan tenure is extended to 30 years, up from 25 years. In addition, a civil servant who purchases a house without a government housing loan may now apply and use the money for renovation works.

The Sin Sectors – Only Smokers Get Affected

Observers were expecting taxes on “sin” sectors, such as alcoholic beverages, cigarettes and gaming, to be raised. Such fears prompted a pre-Budget sell-down in related stocks. However, the main surprise was that only cigarettes were singled out, while duties on the others were left untouched. Excise duty on cigarettes will increase by 3 sen per stick to 18 sen, hence duty for a 20-stick pack would be raised by 60 sen. The government also announced that it would regulate the minimum packaging for cigarettes, so that a pack would be too expensive for youngsters to purchase.

IDR

The Iskandar Development Region (IDR) will be allocated an additional RM300m under the Strategic Investment Fund to strengthen private investment in the region.

SMEs

Small-to-medium enterprises (SMEs) will be granted Accelerated Capital Allowance, whereby all assets in the form of plant and machinery acquired in assessment years 2009 and 2010 can be claimed within one year. SMEs can also claim full Capital Allowance on all small value assets within one year.

Employment Benefits

The 2009 Budget also proposed tax deductions for more employee benefits, such as travelling allowance of up to RM2,400 per annum, mobile phone and Internet bills, staff loans, staff discounts, traditional medicine treatment, maternity expenses and childcare allowances. This will enable companies to be more creative in offering staff a complete remuneration package without a tax penalty, which could then help in staff retention.

Analyst’s View

Foreign analysts from Royal Bank of Scotland Group voiced concern that the government is too dependent on oil revenues to fund the budget allocations. Lower oil prices may hurt revenue and put the nation’s currency and credit rating at risk, said RBS’s Singapore-based analysts, Sanjay Mathur and Scott Wilson.

In a research note, it said that the Prime Minister was counting on oil prices to average US$125 a barrel in 2009, unchanged from 2008. “Softer oil prices could derail the fiscal arithmetic,” it said.

It added that the ringgit, with risks skewed to the upside, may drop to RM3.50 per dollar by year-end. Bank Negara’s accommodating monetary policy, it said, could add pressure on the ringgit.

The central bank maintained its overnight policy rate at 3.5% since April 2006 even as inflation jumped to 8.5% year-on-year in July, a 27-year high. Unless the fiscal trend is reversed, Malaysia’s sovereign rating could be downgraded in the medium term, it said.

2Q08 GDP Moderated to 6.3%

As expected, Malaysia’s real GDP growth in the second quarter of 2008 moderated. It was 6.3%, lower than the 7.1% registered in the first quarter and 7.3% in the fourth quarter of 2007.

On the supply side, growth momentum was attributed by the services sector which grew by 7.6% (1Q08: 7.9%) and the manufacturing sector that expanded by 5.6% (1Q08: 7.0%). On the demand side, growth was driven by private final consumption (9.0%; 1Q08: 11.7%) and external trade with trade balance growth of 20.0% (1Q08: 26.4%).

For the first half of the year, real GDP grew by 6.7%, higher than the 5.6% registered in the first half of 2007.

In the 2009 Budget, Malaysia expects growth this year to be 5.7%, a downward revision from the 6.3% announced by Bank Negara Malaysia when the central bank released its annual report early this year. Malaysia real GDP grew by 6.3% last year. For the 2009, the official forecast is 5.4%.