This article first appeared in The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

MUCH has been said about the previous administration’s Budget 2023 and the upcoming retabling of a refreshed version by Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim on Feb 24 — just eight months ahead of the scheduled tabling of Budget 2024 on Oct 13.

What is certain is that whatever improvements and goodies that are dished out to the rakyat this Friday has to take into account the country’s fiscal position, that has been scraped thin by previous largesse and further stretched to save lives and livelihoods during the Covid-19 pandemic.

With state elections in Selangor, Penang, Negeri Sembilan, Kedah, Kelantan and Terengganu slated to be held by July this year (likely after Hari Raya Aidilfitri in April), it is no surprise that Anwar, in reply to questions on whether new taxes are being mulled to rein in the national debt, said in parliament on Feb 14 that the government did not plan to introduce any kind of broad-based consumption tax such as the Goods and Services Tax (GST) to tackle immediate challenges but would be cutting subsidies for the rich, just as what has been done for electricity.

Ahead of this Friday’s 4pm live telecast of Budget 2023, here are The Edge’s estimates on what the numbers could look like, taking into account clues given in parliament last week as well as 2022 preliminary figures released by Bank Negara Malaysia in conjunction with the release of 4Q2022 gross domestic product (GDP) on Feb 10.

The new Budget 2023 is likely to be the largest in size at the point of tabling, beating the old Budget 2023’s headline RM372.3 billion, our back-of-the-envelope calculations show.

Those tracking budget numbers, however, know that Budget 2022 — which was RM233.5 billion at the point of tabling and revised to RM385.3 billion, but is likely to have seen actual spending closer to RM393.9 billion (according to preliminary data from Bank Negara) — would still be the biggest in terms of actual spending (see chart).

There are three reasons why we arrived at this conclusion.

First, when providing a breakdown of Malaysia’s RM1.5 trillion debt and liabilities, Anwar said its debt service charges were expected to rise from RM41 billion, or 14% of revenue, in 2022 to RM46 billion, or 16% of revenue, in 2023 (see Table 1 on Page 53).

That implies 2023 federal government revenue being slightly smaller year on year at about RM288 billion, with the dividend from Petronas likely to be similar to the previous announcement of RM35 billion (smaller than RM50 billion in 2022 to pay the outsized RM77 billion blanket subsidy bill). Federal government revenue was RM294.3 billion in 2022, according to preliminary figures appended in Bank Negara’s 4Q2022 bulletin.

Second, we reckon that development expenditure would match the old Budget 2023’s RM94.3 billion and be bigger than the RM70.2 billion spent in 2022, given that Anwar had previously said Malaysia’s development programmes would not come under strain even though some allocations would be “reduced”.

This year’s development expenditure is expected to be an “elevated” figure, given that Malaysia needs to borrow to redeem the US$3 billion 1Malaysia Development Bhd-related 10-year US dollar debt paper with 4.44% coupon per annum that matures next month.

The amount, which works out to RM14 billion (US$1=RM4.50), is likely to have been included in the old Budget 2023 as part of development expenditure, given that the federal government does not have enough revenue to cover both its operating expenses for 2023 as well as the 1MDB bond redemption obligation. With the expiry of exemptions under the special 2020 to 2022 pandemic-time Covid-19 Fund with RM110 billion ceiling (only RM3.27 billion space left), the federal government can no longer borrow to fund operating expenses, which debt repayments should normally fall under — a sign of fiscal strain inherited from previous administrations.

Third, while the country’s outsized subsidy bill is expected to be smaller this year, Anwar said last month that the 2023 fiscal position would not be comfortable. Back then, he said the 2022 fiscal deficit was 5.8%.

Thanks to stronger than expected GDP growth of 8.7% year on year (y-o-y) in 2022, however, the fiscal deficit is likely closer to 5.6% of GDP, our back-of-the-envelope calculations show.

That’s more reason to ensure the government spends enough on human capital and strategic capacity development as well as stimulates economic growth to grow the wealth pie for the people as well as ensure that the economy grows faster than its debt burden.

As such, if one were to assume a fiscal deficit of 5% of GDP for 2023, and 4% to 5% y-o-y GDP growth, mathematically speaking, the new Budget 2023 should be about RM380 billion — just above the old Budget 2023’s headline figure of RM372.3 billion.

Based on these assumptions, the fiscal deficit would fall closer to 4.5% of GDP this year if the current administration is able to find at least RM10 billion savings on operating expenses or sizeable additional revenue, back-of-the-envelope calculations show.

While Anwar said earlier this year that the country could save up to RM10 billion from leakages that occur by improving governance on government procurement and spending, it would not be easy for the government to bring down “fixed” operating expenses like civil service emoluments and pensions as well as debt service charges, which together make up 60% to 65% of operating expenditure.

Of these, debt service charges — which are interest payments on the country’s trillion-ringgit debt burden — are the least productive expense and not a political hot potato compared with, say, a reform of public pensions from a defined benefit — where the government is wholly responsible for retirement savings — to a defined-contribution structure like the Employees Provident Fund (EPF) for private-sector wage earners, where the burden is on the latter, with employers contributing to retirement savings rather than being wholly responsible.

At RM46 billion or 16% of revenue in 2023, debt service charges are likely to be larger than the dividend from national oil company Petroliam Nasional Bhd (Petronas) that was pencilled in at RM35 billion in the old Budget 2023.

Put another way, instead of contributing more significantly to the country’s development, dividends from Petronas have not been enough to cover even interest payments on the country’s debt burden that has grown so much over the years on the back of unbridled spending of the past and necessary spending during the Covid-19 pandemic. That alone should be a red flag on overdue reforms, even if debt service charges were to stay below 15% of government revenue (see “When Petronas dividends are not enough to cover the government’s interest payments” on Page 53).

Direct federal government debt alone had reached RM1.08 trillion, or 60.4% of GDP, at end-2022 — more than double the RM501.6 billion, or 51.6% of GDP, that it stood at just a decade ago at end-2012, official figures show. Back in 2012, debt service charges were RM19.5 billion or 9.4% of federal government revenue.

Just five years ago in 2018, debt service charges were RM30.5 billion or 13.1% of federal government revenue — at least RM15 billion lower than this year’s expected expense of RM46 billion — when direct federal government debt stood at RM741 billion or 51.2% of GDP.

Even if it is just RM10 billion savings in debt service charges, that savings would translate into 0.5% of GDP a year while RM15 billion would work out to 0.8% of GDP — a significant sum in terms of potential stimulus as well as reduction in fiscal deficit.

That RM10 billion savings can be delivered if the interest cost is down by at least one percentage point or if direct federal government debt can be reduced closer to RM900 billion or less from what is expected to be closer to RM1.15 trillion or RM1.2 trillion by end-2023, back-of-the-envelope calculations show. The latter would be possible if Malaysia had at least RM300 billion of assets to sell to pay down debt.

This may be why some parties, including Parti Keadilan Rakyat lawmaker Wong Chen, have again brought up the possibility of a Petronas IPO, taking a leaf from Saudi Aramco’s mega listing in 2019. Wong reportedly told journalists on Feb 14 that selling 20% of the national oil company to the public could raise RM300 billion to pare debt and replenish national coffers.

At the time of writing, Anwar had yet to rule out this proposal, which previously surfaced but is understood to have never been pursued seriously. Those familiar with Petronas previously said it would be easier to list units of Petronas but not the entire entity, something the national oil company had previously done with Petronas Chemicals Group Bhd, Petronas Gas Bhd, Petronas Dagangan Bhd and the KLCCP Stapled Group, which owns the Petronas Twin Towers. These units still pay generous dividends annually to Petronas, which remains a major shareholder.

It is not immediately known if Petronas has more assets or units that can be carved out and floated to raise a smaller but still significant amount.

Given the significance of Petronas dividends to the federal government’s annual revenue and budget planning, a decision to proceed with an IPO — should it happen — would mean that the federal government is fine with greater transparency as well as losing out on 20% (or whatever stake sold) of all future dividends by Petronas, which may or may not be able to immediately raise income levels to maintain the same level of payouts to the government.

Whatever the new Budget 2023 holds, the fact that Anwar had mentioned in parliament the need for economic growth to outpace the jump in debt is a good sign. Malaysia, however, needs execution to match the clever messaging from a known orator.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.