Malaysia’s trade-dependent economy shrank by 17.1 percent in the second quarter following tough measures to control the coronavirus.
Malaysia unveiled an expansionary budget on Friday aimed at spurring domestic activity, according to government reports, as it grapples with the economic fallout of the COVID-19 pandemic amid rising political uncertainty.
The passage of the budget is seen as vital for both the coronavirus-hit economy and Prime Minister Muhyiddin Yassin, whose position is under threat from the opposition and cracks in his own coalition. A defeat of the budget would amount to a no-confidence vote for Muhyiddin and would plunge the Southeast Asian country into more political instability.
The government boosted spending in the 2021 budget by 2.5 percent to 322.5 billion ringgit ($77.94bn) even as the fiscal deficit is expected to hit 6 percent this year – its highest since the 2009 global financial crisis, one of the reports showed.
“The government believes that the current fiscal policy response is the right course of action,” Muhyiddin said in his foreword for the government’s 2021 fiscal outlook report, released ahead of the budget speech.
“There has been an urgent need to ensure [that] substantial stimulus measures and [the] economic recovery plan are implemented expeditiously.”
Spending grew in 2020 as the government rolled out 305 billion ringgit ($73.8bn) worth of stimulus packages to cushion the blow from COVID-19, while revenues shrunk along with the economy, projected to fall 4.5 percent this year, the report showed.
But the fiscal deficit will likely narrow slightly in 2021 to 5.4 percent, with the economy seen rebounding between 6.5-7.5 percent and revenues rising next year on improved domestic and global demand, it said.
The budget comes as Malaysia’s economy has been hit hard by the pandemic. The trade-reliant economy saw its first contraction in more than 10 years in the second quarter, as the coronavirus outbreak slammed business activity and exports, causing gross domestic product (GDP) to drop 17.1 percent.
Growth next year is expected to be supported by a 2.7 percent rise in gross exports after a 5.2 percent fall in 2020, according to a separate report on the economic outlook.
But government debt is also expected to rise moderately to 61 percent of GDP in 2021 – above the government’s self-imposed limit of 60 percent – as it boosts borrowing to finance fiscal support.
The total spending increase includes a 4.3 percent rise in the operating budget – the cost of running the government – to 236.5 billion ringgit ($57.2bn), while development spending on items such as infrastructure will jump 38 percent to 69 billion ringgit ($16.7bn) in 2021.
Revenue meanwhile is seen rising 4.2 percent to 236.9 billion ringgit ($57.3bn) next year, including an estimated 18 billion ringgit ($4.4bn) in dividends from state energy firm Petronas.
Monetary policy will continue to provide support to the economic recovery next year, the government said in the economic outlook report, flagging “the resurgence of COVID-19 cases, geopolitical tensions and weak commodity prices” as downside risks.