Malaysia Budget 2022

 

 The theme for Budget 2022 is "Keluarga Malaysia, makmur sejahtera" (Malaysian family, prosperous and peaceful). 

Finance Minister Tengku Zafrul Abdul Aziz said it is based on three core concepts "rakyat yang sejahtera" (people's wellbeing), resilient businesses and a prosperous economy.

Screengrab from the live broadcast of the Budget 2022 speech from Parliament on Oct 29, 2021.

PETALING JAYA: Tengku Datuk Seri Zafrul Abdul Aziz has started delivering his Budget 2022 speech in Parliament here on Friday (Oct 29).

The Finance Minister is expected to deliver a Budget in line with the Malaysian Family concept, which will concentrate on the country's recovery after the Covid-19 pandemic.

On Wednesday (Oct 27) Prime Minister Datuk Seri Ismail Sabri Yaakob said Budget 2022 was from the people, by the people, for the people and would be of high impact for all layers of society and businesses.

Ismail Sabri said Budget 2022 would also generate more jobs to tackle unemployment and enable the recovery process to return the country and its economy to the pre-Covid-19 pandemic with new norms in place.

He added that Budget 2022 was drawn up carefully and comprehensively, taking into account the views of all quarters, including Opposition parties.

Here are the highlights of the Budget 2022 speech as they are delivered:

Budget 2022 allocation

Budget 2022 has a total allocation of RM332.1bil, the largest-ever for the country. This surpasses Budget 2021 allocation of of RM322.54bil.

Tengku Zafrul said this involves RM233.5bil in administrative expenses, RM75.6bil in development, RM23bil for the Covid-19 fund and RM2bil for unexpected expenses.

Family focus

The Bantuan Keluarga Malaysia outlined in Budget 2022 will benefit over 9.6 million recipients with an allocation of RM8.2bil.

Households with three children or more with household income less than RM2,500 will receive RM2,000 in aid. An extra RM500 will be given to for single mothers/fathers with dependents and monthly income of up to RM5,000. This means single mothers/fathers with three children and above are entitled to a maximum RM2,500 in aid.

An additional allocation of RM300 will be given to senior citizens.

Overall, RM2.4bil in welfare aid is allocated to benefit over 440,000 households.

Education first

Education gets the biggest slice of the pie in Budget 2022 with RM52.6bil for the Education Ministry and RM14.5bil for the Higher Education Ministry.

Tengku Zafrul said this includes RM450mil in aid to be provided to three million students.

Health matters

Health Ministry gets an allocation of 32.4bil, the second-largest after the Education Ministry.

From the allocation, RM2bil will be channeled to purchase of vaccines and RM2bil for additional Covid-19 expenses.

He added that the government would be purchasing another 88 million doses of vaccines, which includes the third dose for children between the ages of 12 and 17.

PTPTN repayment incentives

Government to give discounts to PTPTN borrowers for payments from Nov 1 to April 30.

Borrowers will get a 15% discount for full settlement; 12% for payments of at least 50% of the outstanding balance in a single payment. Those who make repayments through salary deduction or scheduled direct debit will get a 10% discount.

Just for jobs

Allocation of RM4.8bil to create 600,000 job opportunities under the JaminKerja initative.

With a target of 300,000 hires, the initiative will offer incentives to employers such as 20% of the first six months' pay, and 30% of the following six months pay for hired employees making above RM1,500.

Among others, RM1.1bil has been allocated for training and upskilling programmes for 220,000 trainees.

The Technical and Vocational Education and Training (TVET) sector will receive an allocation of RM6.6bil under Budget 2022.

Tengku Zafrul said the focus is on eeting industry needs and an additional allocation of RM200mil has been allocated for joint venture programmes with industries.

Boosting healthy lifestyles

There will be an excise duty imposed on nicotine-based gel or liquid products for vaping and electronic cigarettes, says the Finance Minister.

"Towards a healthy lifestyle the government plans to broaden the scope of excise duty to include premix sugary drinks made from chocolate, malt, coffee and tea," said Tengku Zafrul.

Women matters

The goverment will make it mandatory for all publicly-listed companies to appoint at least one woman to its board of directors.

Tengku Zafrul said RM5mil would also be allocated for the Women Leadership Foundation to encourage female participation in the economic sector.

Free self-hygiene kits will be given to young women in the B40 category monthly, which will benefit some 130,000 youths nationwide.

Tengku Zafrul added that RM11mil would be allocated for free mammogram and cervix examinations.

New villages

A total of RM200mil has been allocated for the Chinese community, among them for the purpose of upgrading Chinese new villages, as well as financing schemes for the small and medium enterprises (SMEs).

RM145mil has been set aside for the Indian community, among them for the implementation of programmes to strengthen the community's social economy through Tekun Nasional, the national Entrepreneurial Group Economic Fund, under the Indian Entrepreneurs Development Scheme.

Levelling up eSports

To push the eSports industry in the country, RM20mill will be allocated under Budget 2022.

This includes RM5mil to develop an excellence centre for drone sports in the country.

Housing for all

RM1.5bil has been allocated for continuing low-cost housing projects. Another RM2bil allocated for housing credit guarantee scheme to help those without a stable income to buy a house.

Tengku Zafrul also said the government would no longer impose the real property gains tax (RPGT) on Malaysians, permanent residents and companies when they dispose of their real property assets from the sixth year onwards.

For sporting excellence

To further improve the national Paralympics team, the National Sports Council (NSC) will receive a RM10mil allocation. This is to enhance training programs and organise leagues for various sports to prepare for the 2024 Paris Paralympics.

RM158mil will be allocated to renovate, enhance and build sporting facilities around the country.

RM50mil will be allocated to encourage people to continue leading an active lifestyle.

Cash in hand

Employees’ contribution rate to the Employees Provident Fund (EPF) that was reduced to 9% in 2020 will remain until June 2022.

Boost for youths

A RM300mil allocation to provide RM150 in credit into eWallets of youth aged 18 to 20 who are students at institutions of higher learning.

Lower vehicular taxes continue

To reduce the cost of vehicle ownership, the government will extend the 100% sales tax exemption on completely knocked down (CKD, locally-assembled) passenger vehicles and 50% on completely built-up (CBU, imported cars) including MPVs and SUVs for six months until June 30, 2022.

The exemption was introduced by the government in 2020 to drive sales in the automotive sector which was affected by the Covid-19 pandemic.

Defending the nation

The Defence Ministry will get an allocation of RM16bil, of which RM1.6bil is to upgrade the readiness of main assets of the Armed Forces. This allocation also involves RM14mil to replace main equipment of Naval Special Forces (Paskal) and Air Force Special Forces (Paskau) such as parachutes, closed-circuit diving equipment and boats.

e-vehicles to get a power up

Tengku Zafrul said the government sees the potential of electronic vehicles (EV) to minimise pollution, and therefore plans to give up to 100% exemption of import and excise duties as well as sales tax.

Road tax exemptions of up to 100% will also be given out for electronic cars.

Tax relief of up to RM2,500 will be given for the purchase, assembly, renting and leasing of EVs.

Tourism budget

A total of RM1.6bil has been allocated for the tourism industry. RM600mil will be allocated under the Penjana Tourism Financing dan BPMB Rehabilitation Scheme while RM85mil will be go towards a three-month special assistance for over 20,000 tourism operators.

Zafrul also announced matching grants for the purpose of the renovation of budget hotels and homestays, with an allocation of RM30mil.

To spur domestic tourism, the RM1,000 tax rebate will be extended until 2022.

Sabah and Sarawak

The two states will receive increased development allocations of RM5.2bil and RM4.6bil respectively under Budget 2022.

Fisheries and agriculture

RM1.7bil allocated for the various incentives and subsidies for the fisheries and agriculture industries.

Please folllow The Star's coverage of Budget 2022 here.

Click on the logo to see the full text of Tengku Zafrul's Budget 2022 speech in Malay.

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 Here are five key takeaways from Malaysia’s 2022 budget:

5 key takeaways:

1. What’s in it for households, firms hit hard economically by COVID-19?

https://www.bharian.com.my/berita/nasional/2021/10/881438/bajet-2022-bantuan-keluarga-malaysia-bkm-sebanyak-rm2000

Households are set to benefit from a new cash aid scheme - Malaysian Family Assistance. Under the scheme, RM8.2 billion will be allocated to households, benefitting more than 9.6 million recipients, said Mr Tengku Zafrul. 

 Households with three or more children and a monthly income of less than RM2,500 will receive a one-off payment of RM2,000. 

Additionally, single parents or households earning less than RM5,000 each month will receive a one-off payment of RM500. Senior citizens will also receive RM300 each. 

Companies will also receive aid to get back on their feet.

Among others, income tax instalment payment for micro, small- and medium-size enterprises (SMEs) can be deferred for up to six months until Jun 30, 2022. 

Landlords who give rental discounts of at least 30 per cent to businesses will be granted tax relief. 

Firms are also given tax deduction of up to RM300,000 to renovate their spaces, such as to improve seating arrangement or air circulation, in order to minimise the spread of COVID-19. 

2. What additional resources will the health sector get?

The Health Ministry is set to receive RM32.4 billion, the second largest allocation behind the Education Ministry. 

Mr Tengku Zafrul outlined that RM4 billion has been allocated for COVID-19 management, of which RM2 billion is for vaccines and another RM2 billion is to boost the capacity of public health facilities such as by purchasing test kits, personal protective equipment and medication. 

He added that the government has signed agreements to obtain 88 million doses of COVID-19 vaccines, which are sufficient to immunise more than 140 per cent of the population, and enough to give third doses to all residents above the age of 12.

Mr Tengku Zafrul also announced that RM100 million will be allocated to sponsor 3,000 contract medical and dental officers to pursue specialist programmes.

3. What are the green measures?

Meanwhile, Mr Tengku Zafrul said the 2022 budget was formulated while keeping in mind the 17 Sustainable Development Goals (under the the 2030 Agenda for Sustainable Development) and the implementation of environmentally friendly programmes. 

In line with Malaysia’s commitment to be carbon neutral by 2050, he announced that the Voluntary Carbon Market initiative will be launched under the auspices of Bursa Malaysia. 

“This initiative will act as a voluntary platform for carbon credit trading between green asset owners and any entity towards a shift to low-carbon practices,” said Mr Tengku Zafrul. 

 Related:

12th Malaysia Plan: What you need to know about the 2050 carbon neutral goal and other green measures

Tengku Zafrul added that the government is also looking to support the development of the local electric vehicle (EV) industry, and intends to provide full exemption on import duty, excise duty and sales tax for EV vehicles. 

Road tax exemption of up to 100 percent is also given to the vehicles.

In addition, individual income tax relief of up to RM2,500 will be given to offset the costs of purchase and installation, rental and hire purchase as well as subscription fees for EV charging facilities.

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4. How will tourism industry players benefit? 

The budget also encompasses initiatives targeted at players in the tourism industry, which have been hit badly by COVID-19. 

Mr Tengku Zafrul said a total of RM1.6 billion will be allocated for a number of efforts, including a RM600 million wage subsidy for tour operators who have experienced at least 30 per cent dip in income. More than 26,000 employers and 330,000 workers are expected to benefit from these subsidies, he added. 

Tengku Zafrul added that matching grants worth RM30 million will be given to more than 700 budget hotels and homestays registered under the Ministry of Tourism, Arts and Culture for repair works. 

He said RM60 million in incentive funds will be allocated for activities to promote domestic tourism. Moreover, special individual income tax relief of up to RM1,000 for residents who spend on domestic tourism will be extended until 2022. 

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IN FOCUS: After losing parents to COVID-19, Malaysian children and caregivers are picking up the pieces

5. What kind of assistance will be given to women, children?

A key highlight for the 2022 budget is the special assistance given to women and children. 

Mr Tengku Zafrul announced that the government is making it mandatory for all public listed companies to appoint at least one woman to its board of directors in order to recognise women’s roles in the decision-making process. 

“Currently, women hold 25 per cent of the board positions in 100 main public listed companies. 

“However, 27 per cent or 252 companies listed on Bursa Malaysia still do not have women on their boards,” he said. 

The minister added that companies who hire unemployed women, housewives and single mothers will receive government incentives. Putrajaya will pay incentives amounting to 30 per cent of their monthly wages for the first six months, and 40 per cent for the next six months. 

This applies to monthly salaries of RM1,200 and above, the minister said. 

Additionally, the government is looking to allocate an additional RM13 million to the police’s Sexual, Women and Children’s Investigations Division (D11). 

Addressing the issue of orphaned children whose parents succumbed to COVID-19, Mr Tengku Zafrul said that RM25 million will be allocated to Yayasan Keluarga Malaysia to ensure their education, welfare and future.  

“The government urges all parties, including NGOs, local communities, local leaders and even corporate companies to play a role to ensure that the welfare of these children continue to be safeguarded so that everyone can live together as one family without separation and build a bright future,” he said. 

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Should we be worried about debt?

 According to Bank Negara’s Financial Stability Review report for the first half of 2021, Malaysia’s household debt to GDP has declined to 89.6% from 93.2% as at end of last year. Although a small achievement,the household debt level remains elevated.

With a current debt-to-gdp of about 125%, the US is not the only country with a huge mountain of debts.

IN recent weeks, global markets were roiled by the mere mention of a four-letter word, debt. From China’s Evergrande Group’s near collapse, as it sat on a mountain of liabilities, to the United States government’s need to raise its debt ceiling.

In Malaysia’s case, we too have not much choice either but to raise our debt ceiling as we look at ways to re-generate the economy with a higher debt room of 65% of gross domestic product (GDP) from 60% currently.

It seems like debt has become one dirty word for investors for the time being, as we all know there is a price to pay when it comes to debt as there is no such thing as a free lunch.

For the US, there is no doubt that they have constantly raised their debt ceiling over the years to ensure they do not default on their obligations.

According to the US Treasury website, since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the nation’s debt limit.

Currently suspended, the US debt ceiling was reset on Aug 1, 2021, to US$28.4 trillion (RM118.9 trillion). For the US, failure is not an option as it will lead to a catastrophic chain reaction to not only the financial market but to the economy as a whole.

According to Treasury Secretary and the former Federal Reserve (Fed) chairperson, Janet Yellen, (pic) the US has never defaulted on its debt before and she was “confident” that the issue would be addressed, despite warning the Congress that the deadline for the debt ceiling is “around Oct 18”.

According to Treasury Secretary and the former Federal Reserve (Fed) chairperson, Janet Yellen, the US has never defaulted on its debt before and she was “confident” that the issue would be addressed, despite warning the Congress that the deadline for the debt ceiling is “around Oct 18”.

For now, while a nine-week stopgap funding bill has been endorsed by the President on Thursday, which in all likelihood will avoid a government shutdown at least up to Dec 3, 2021, the threat of a US defaulting on its debts remains.

While the US is able to continue to print money by simply passing the law to keep borrowing, the US, just like any other country, cannot go on borrowing forever. With a greater supply of money, sooner or later, interest rates will have to rise as the increase in money supply will likely fuel inflation.

After all, the Fed too expects rates to start rising in 2022 and much more in 2023 onwards.

In the last Federal Open Market Committee just over a week ago, the 10-year and 30-year US benchmark rates have already moved 17 basis points (bps) and 21 bps to 1.50% and 2.06% respectively – as the market begins to price in expectations of the Fed’s tapering move as well as worries if there is going to be lengthy impasse between the Democrats and the Republican or grand old party (GOP) to raise the debt ceiling.

Having said that, as the US has been running budget deficits for the longest time, it would not be too far-fetched to assume that given time, the US will need to raise the debt ceiling yet again in the future.

Hence it was also of no surprise when Yellen commented on Thursday that the debt ceiling ought to be permanently abolished.

In any government’s financial management, it’s either shortfall or revenue, mainly due to inadequate tax collections or excessive spending, which are also a function of debt service charges, and to a certain extent, over-priced development spending or operating expenditures.

With a current debt-to-gdp of about 125%, the US is not the only country with a huge mountain of debts.

So is the rest of the world. In fact, according to the Institute of International Finance (IIF) in its Global Debt Monitor report published on Sept 14, 2021, global debt, which includes government, household and corporate, and bank debt increased by US$4.8 trillion (RM20 trillion) to reach a new alltime high of US$296 trillion (RM1.24 quadrillion).

In essence, over the past six quarters, as the pandemic has caused significant damage to the global economy and unprecedented response from governments, total global debt has expanded by US$36 trillion (RM150.7 trillion) or 13.6% from just about US$260 trillion (RM1.09 quadrillion) as at end of 2019.

Money has to go somewhere

When a debt is raised, be it by the government, a company, or a household, it has to go somewhere. For most governments, debts are mainly raised for development expenditure, and if it is allowed by the constitution, on operating expenditure too.

Debts raised due to the pandemic perhaps has become the norm globally as well, as the government has no choice but to raise the required funding to support the economy.

In the US, the Fed also buys US treasuries and agency mortgage-backed securities and this effectively makes its way into the financial markets.

So while the Fed has expanded its balance sheet by more than 100% since the pandemic, the liquidity it has provided has caused significant gain not only in traditional asset classes but into everything else. Home prices are rising, commodities have boomed and markets are buoyant and cryptos have soared.

In the case of Evergrande Group, many are left wondering if it was a case of a “too-big-to-fail” company. Evergrande became a property developer largely by borrowing.

As a group, they also ventured into other businesses, which among others include electric vehicles, Internet and media production, theme park, football club, and even into mineral water and food production.

Evergrande’s massive business empire, grown out of debt means, while it has substantial assets, it also had huge liabilities. As Beijing has been strong in putting its house in order in the form of new regulations and guidelines for many industries, Evergrande too was not spared.

As early as August last year, the Chinese government had introduced a “three red lines” test for developers to meet if they wanted to borrow more.

This was firstly, liability to asset ratio of not more than 70%; secondly, net debt to equity ratio of not more than 100%; and thirdly cash to short-term debt ratio of more than 1.0.

Hence, the writings were already on the wall on Chinese developers more than a year ago that the regulators were serious in addressing debt-driven growth pursued by these companies. In Evergrande’s case, the debt hit the ceiling.

Why do we go into debt?

Debts taken by individuals are rather straightforward. Of course, there are good debts and bad debts. For most of us, it is for the purchase of big-ticket items like a roof over the head, and for mobility purposes, where most of us own a car.

Of course, we also indulge ourselves with material stuff, either from our savings or credit cards that we will pay off when the time comes. Some of us, due to lack of income or due to financial mismanagement, take on bad debts and that’s where the trouble starts as we are unaware of the consequences of rising personal debts and high-interest cost.

Stories of debts owed to money lenders are common within our society while Bank Negara statistics also show that one of the fastest-growing debt profiles among individuals is personal loans.

This has remained relatively high and has increased by 87.4% over the last five years alone to about Rm73.7bil as at end of August 2021, while its share of the banking system loans outstanding has increased from 2.7% to as much as 4.0% now. 

 

According to Bank Negara’s Financial Stability Review report for the first half of 2021, Malaysia’s household debt to GDP has declined to 89.6% from 93.2% as at end of last year. Although a small achievement, the household debt level remains elevated. For a company, debts should be part of capital management as companies need to not only sustain their business operations but look at opportunities to grow and expand their market share, either via acquisition or via borrowings. However, similar to what we have seen in Evergrande’s case, companies too must observe their own “three-red-lines” to ensure they have the right mix and remain vigilant of its exposure.

Does Malaysia have the room to borrow more?

For Malaysia, with a higher debt ceiling of 65%, the government is effectively allowing itself to have some headway to borrow an additional Rm75bil to support the recovery momentum that most economists now expect will be much stronger in this fourth quarter period and 2022 and as we prepare ourselves for the post-pandemic period.

While we have created this room to enable us to borrow more, we must be mindful to borrow responsibly as debts that are taken today will be borne by future generations.

We also need to chart our way out of this debt-dependency black hole that we have been in since the Asian Financial Crisis of 1998 and get out of this conundrum.

While debt-to-gdp is just a denominator that is divided by a numerator that is steadily growing, we must find ways to manage our overall federal government debt and plan to reduce them post-pandemic.

That is a whole new topic altogether, and next week, this column will explore strategies that Malaysia can deploy to reduce its debt dependency.

  PANKAJ C. KUMAR Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own.   Source link

 

 US federal debt crisis uglier than Evergrande trouble

 

 

 

 There is much buzz amongst global investors recently about two possible debt defaults, though they are of different proportions in their would-be impact on global equity markets. One is the US federal government's rivers of borrowed money running dry and in urgent need of replenishing. The other is a major Chinese property developer which has run into financial trouble, because the company veered off the road by squandering too much on making electric cars and sponsoring a football club.

As US federal debt default looms, US Treasury Secretary Janet Yellen is facing her biggest test in her eight-month tenure to convince reluctant Republican lawmakers to agree to raise the US' national debt limit, which is currently set at $28.5 trillion. The stakes are high, because if Yellen's effort fails, the US financial system will collapse.

Yellen has called Republican leaders to convey the economic danger which lays ahead, bluntly warning that the Treasury Department's ability to stave off default is limited, and the failure to lift the debt cap by late October would be "catastrophic" for the country and the world.

Six former US treasury secretaries last week sent a letter to top US lawmakers, warning them a default would roil financial markets and blunt economic growth. According to US media reports, Yellen last week also warned the nation's largest banks and financial institutions about the very real risk of a default. She has spoken to chief executives of JPMorgan Chase, Bank of America, BlackRock and Goldman Sachs, briefing them the likely disastrous impact a federal default will produce.

To make things worse, both Democrats and Republicans in the US are at each other's throats now over US President Joe Biden's new $3.5 trillion spending bill, which proposes heavy tax raises on rich families and corporations, and has met fierce opposition from Republican lawmakers. Whether they will compromise on the debt limit, by making a last-minute deal with the White House to reduce Biden's giant spending plan remains to be seen.

Market analysts say if the US government defaults on its colossal debt, a financial system crisis of a magnitude larger than the 2008-09 debacle could occur, which is estimated to lead to an evaporation of $15 trillion in wealth and loss of 6 million jobs in the US. The capital market is now on tenterhooks facing a potential financial time bomb.

Last week, the US' major media outlets also focused their reportage on a possible default of a leading real estate developer in South China, but by all metrics, it is a risk of much smaller scale. The case is being closely watched by China's financial authorities and will never be allowed to develop into a systemic risk.

With regard to the privately-run property developer Evergrande, many fear the knock-on effects of the company's imminent difficulty to pay back principals and interests of borrowed money, including corporate bonds and bank loans. But, even if the city of Shenzhen with its deep pockets, where the company is headquartered, refuses to bail out Evergrande, one bankrupt company can hardly impact the stability of China's financial system, and the risks linked to this possibility have been widely overblown by a hyperventilating media.

Executives at Evergrande are launching a last-ditch rescue effort, trying to sell the company's electric car subsidiary and other assets in China and abroad, including the Guangzhou Evergrande Football Club. It is also selling its housing projects scattered in dozens of Chinese cities at a discount to speed up its cash flow. Whether the company is able to stave off a debt default remains unknown.

Evergrande said on Wednesday that it would make an interest payment on an onshore bonds due Thursday, but the company didn't say whether it had plans to make a $83 million coupon payment due on its US dollar bonds within a month.

The city government of Shenzhen, or the central government in Beijing, has not rushed to bail out Evergande most likely in the belief that the company itself is to blame for the predicament - too much leverage and squandering of borrowed funds ploughed into auto making and other fringe businesses and budgeting largesse. Authorities probably want the case to serve notice to investors at home and abroad, that they need to do their due diligence and enforce accountability on debtors.

However, the central government is almost certain not to tolerate a possible bankruptcy of Evergrande to spill over to draw down the broader Chinese economy, as the central bank has done numerous pressure tests since the 2008 global financial crisis, which was caused by the sub-prime housing debts in the US. Last year, the central bank required property developers to bring down their debt levels below certain thresholds before they are able to borrow more money from financial institutions. And, many Chinese commercial banks have ascertained their exposure to Evergrande is restricted.

So, debt-beleaguered Evergrande is unlikely to produce a firestorm and disrupt China's financial system. In addition, both the government and the central bank have plenty of policy tools, including easing overall monetary policy, to tide over Evergande if it goes under. But of course, the last resort is to bail it out and restructure the company, as China has done with other troubled corporations like HNA, Huarong and Baoshang Bank.

The author By Wen Sheng is an editor with the Global Times. 

 

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  Hopson Development plans to acquire 51% of Evergrande's property management unit Property developer Hopson Development Holding Co is reportedly to acquire about 51 percent of the indebted Evergrande group's property management unit, and the deal could be valued at more than 40 billion HKD ($5.14 billion), according to media 

 

 

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Govcoins and crypto to coexist

 

GOVERNMENT-backed coins and private cryptocurrencies will coexist for a while, despite rising regulatory walls set by the government to counter virtual coins, experts at a global webinar session said Thursday.

Noting that cryptocurrencies and digital currencies by governments are “two different animals,” they will coexist for now partly because current cryptocurrencies are not actually solving payment problems.

“How many of them (cryptocurrencies) are solving actual payment problem? Most of them are speculative and used as a means of storage,” said Nelson Chow, chief fintech officer of the Fintech Facilitation Office at the Hong Kong Monetary Authority.

Chow said that some central bank digital currency, or CBDC, projects such as Multiple CBDC Bridge have the potential to solve decades-old problems for cross-border transactions. Multiple CBDC Bridge is a wholesale CBDC co-creation project between the Hong Kong Monetary Authority, Bank of Thailand, the People‘s Bank of China and the Central Bank of the United Arab Emirates.

Under the current regulatory environment, John Kiffmeiste, a former senior financial sector expert at the International Monetary Fund, said that it is unlikely that the emergence of CBDC projects, now numbering nearly 60 according to Kiffmeiste’s data, would make crypto assets obsolete.

“CBDC has to operate within confines of tax regulations, anti-money laundering, KYC (know-your-customer) and so many other regulations whereas cryptocurrencies don’t operate in that environment,” the economist added.

Speakers at the webinar co-hosted by The Investor, a tech media outlet run by The Korea Herald, Malaysia’s The Star and the Asia News Network.

But, Kiffmeiste pointed out that as the regulatory and legislative walls are closing in on crypto assets, they will come under the same rules that other types of conventional currencies operate under. “In that case, that levels the playing field. Perhaps in that new world, CBDCs and cryptocurrencies coexist, but crypto assets become redundant as at least payment medium.”

Andrew Sheng, one of Asia’s top economists, stressed that authorities should understand the complex contextual backgrounds that have brought about the rising interest in CBDCs and cryptocurrencies.

Noting that the value of the cryptocurrency market has reached US$1.2tril – half the value of the official gold reserves – Sheng said cryptocurrencies had grown outside of the purview of public control. “This was the big lesson of the Covid-19, private cyber currencies will be with us whether you like it or not,” Sheng said.

The tug-of-war between regulators and cryptocurrencies is most apparent in the US in the area of stablecoins like USD Coin, a digital equivalent of the US dollar.

The US-proposed Stable Act will bring USD stablecoin issuers into conventional regulatory perimeters.

Kevin Werbach, a professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania, said that the cryptocurrency industry does not have to be allergic to regulations.

“There is always a notion that we have to choose either innovation or regulation. And I think it’s a false dichotomy. For new technological markets to mature and develop, they need to be trusted. They need to get to the point where ordinary people around the world are willing to participate in these activities at scale, and regulations are an important part of that,” Werbach said.

As to the increasing public controls on crypto assets, speakers called for regulations compatible with the emerging cryptocurrency industry. They shared a similar view that cryptocurrency companies and regulators must work together on bringing the industry into the system.

“Since innovation is always ahead of regulation, it is inevitable for regulators to rely on us when drafting policies. It is crucial to reshape their ‘legacy mindset’ and make them understand the nature and dynamics of cryptocurrency,” said Marcus Lim, CEO and co-founder of Zipmex.

They were speaking at a webinar co-hosted by The Investor, a tech media outlet run by The Korea Herald, Malaysia’s The Star and the Asia News Network entitled “The rise of Govcoins & What’s next for crypto”. Speakers at the July 22 virtual seminar included a group of experts in the US, Europe and Asia who are navigating the current situation surrounding the development of central bank digital currencies and challenges posed by and to cryptocurrencies.

Experts said that central bank digital currencies have a huge potential to solve many issues, ranging from decades-old problems involving cross-border transactions to digital transformation.

Kiffmeiste noted that almost 60 jurisdictions are currently exploring retail CBDCs, with countries like the Bahamas and China at the forefront, but they are divided in their motivations for issuing the CBDCs. For instance, emerging economies consider CBDCs as a way to spur financial digitalisation, while advanced economics mull digital currency as part of financial stability and to improve monetary policies. — The Korea Herald/Asia News Network

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Budget 2021 – Great expectations

 

LAST Friday, the Finance Minister tabled what is now known as Malaysia’s largest-ever budget.

The excellently-crafted and well-written budget was presented in a couple of hours and after it was presented, the social media, mainstream media, economists, consulting firms and investment banking strategists gave their views on the measures, especially those related to taxes, incentives or grants.

Now that Budget 2021 has been tabled, lawmakers will debate on the merits and vote on it. Having covered budgets for more than two decades, the devil is in the details and this year is not an exception.

Let’s look at the gross domestic product (GDP) estimate first. The government expects GDP growth for 2020 to contract by 4.5% and for next year, it is estimated to grow by between 6.5% and 7.5% in real terms. For the economy to close the year with the projected contraction, the second half of 2020 has a very small room to contract by only 0.7% as the economy shrank 8.3% in the first half.

This is a tall order as economic data remains largely weak as seen in several indicators, which include the industrial production index as well as the poor reading in the retail sub-segment.

With almost the entire nation under the conditional movement control order, economic growth, if any, will be challenging.

Meanwhile, in nominal terms, the government expects GDP growth to be -4.7% this year and to rise significantly by almost 9% in 2021, as inflation is expected to return with a reading of 2.5%, mainly due to the low base effect from 2020.

Perhaps when the Bank Negara releases the third quarter GDP data on Friday, we can then assess if the full year GDP assumption still holds water or otherwise.

For 2021, the government expects GDP growth to be driven by domestic demand, in particular growth from private consumption while the external sector may post some drag as imports are forecast to grow even faster than exports.

On the supply side, the government expects the services and manufacturing sectors, which account for 80% of the economy, to grow by 7% each while construction is expected to bounce back with a near 14% leap in 2021 after the forecast drop of 18.7% this year. From here, we can observe that one of the key drivers of the economy next year is public investment, as the government has bumped up development expenditure to the tune of RM69bil for 2021 from the adjusted figure of RM50bil this year (which was previously forecast to be at RM56bil).

The government’s total expenditure is now broken into three main buckets – other than operating expenditure and development expenditure, we now have a new line item called the Covid-19 Fund with an allocation of RM38bil this year and RM17bil next year.

In essence, since the pandemic outbreak, the government has introduced various economic stimulus packages under its Prihatin package series and the Penjana package, which in total amounted to RM305bil, while the actual direct fiscal injection totaled RM55bil.

However, under the Temporary Measures for Government Financing (Coronavirus Disease 2019) Act, the Parliament had only approved a ceiling of RM45bil for the fund and hence the Minister has proposed, taking into consideration the nation’s need up to 2022, an amendment that will be tabled to raise the fund to RM65bil, an increase of RM20bil.

This increase that was mentioned in the budget speech is meant for the RM10bil Kita Prihatin package, additional assistance for people’s well-being, as well as to secure the supply of the much-needed vaccine. The table above summarises the government’s revenue projection for this year and the next.

The expected revenue for the second half of the year and into 2021 will be challenging for the government, given the level it had achieved in the first half. As it is, the second half forecast is 23.3% higher than the first half.

In addition, for 2021, revenue and expenditure are expected to increase by 4.2% and 4.3% respectively, which will likely be tough given the tax breaks that the government is proposing, in particular, company income tax (CITA) and personal direct taxes.

Based on government’s estimate, taxes from the two sources are expected to fall by 6.8% and 7.2% this year but will bounce back strongly in 2021 with a growth of 8.8% and 18.2% respectively.Interestingly, the 2021 forecast for CITA and personal direct taxes at RM64.6bil and RM42.4bil is higher than 2019’s figure by 1.3% and 9.7% respectively.

As for expenditure, as total federal government debt stood at RM874.3bil mark or 60.7% of GDP as at end of September 2020, the government’s Debt Service Charges (DSC) too have deteriorated.

From an estimated level of 15.4% of GDP this year, DSC is expected to drop further to 16.5% in 2021, mainly driven by 11.6% increase in absolute DSC to RM39bil.

Although both the DSC ratio in 2020 and 2021 will be higher than the self-imposed fiscal limit ratio of 15%, it is hoped that by beyond 2021, this ratio will be brought under control when the economy is expected to expand further.

All in, Budget 2021 measures are holistic and inclusive for all levels of society and have been cleverly crafted to address the challenges faced by Malaysians, especially those severely impacted by Covid-19.The government has largely listened to the voices of hope in addressing the pandemic world.

Having said that, the expected government’s revenue and GDP projections are rather optimistic, resulting in a much lower budget deficit figure while the forecast government tax revenues too are on the high side. While the DSC has now surpassed the self-imposed ceiling, the government’s debt to GDP ratio is expected to remain elevated for at least this year and in 2021.It is important for the lawmakers to approve this budget as the government has taken steps in keeping the economy going.

While there are some shortcomings in the terms of budget allocations, it is hoped that this can be ironed out during the parliamentary debate stage and all lawmakers come to an consensus to approve the gigantic budget.

Pankaj C. Kumar is a long-time investment analyst. Views expressed here are his own. 

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The FM really got SHOCKED when LGE asked him whether the budget was approved by the cabinet. Watch the video.

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US dollar downtrend seen

THERE seems to be growing expectations among financial analysts that the US dollar strength will dissipate in the medium term as the global economy recovers from the fallout of the Covid-19 pandemic.

According to an analyst survey compiled by Bloomberg, the ICE US Dollar Index, which is a gauge of the greenback’s strength, could weaken about 2% to 94.1 points by the second quarter of next year. The index is currently trading around the 96 level.

Bloomberg also notes that the Deutsche Bank’s Trade-Weighted Dollar Index, which is a gauge of the currency against the United States’ most-important trading partners, has fallen to test the trend line in place since 2011. The report says a breach of that point would be an important signal for dollar bears.

This month alone the index has dropped more than 1% amid the weakening demand for safe-haven assets such as US Treasury bonds, an ongoing rally in risk assets such as equities and a shift in sentiment towards other currencies such as the euro and yuan.

Standard Chartered Bank (StanChart), at a virtual press conference over the week in conjunction with the release of its Global Market Outlook for the second half of 2020, asserts its bearish view on the US dollar over the medium term.

The multinational financial group points to massive US dollar liquidity provision and real interest rate differentials between the United States and other countries as among the factors that should facilitate a reversal in the US dollar decade-long bullish trend.

“The longer-term cyclical US dollar uptrend that began in 2008 has likely peaked, with its downtrend expected to gain momentum over the coming year as the global economy rebounds and US exceptionalism fades, ” StanChart says.

“We expect some bumps on the road for the US dollar downtrend, particularly in the near term. These are likely to be driven by US political and policy uncertainty ahead of the November election, broader geopolitical risks and the evolution of the pandemic, ” it adds.

StanChart says it considers such events as opportunities for medium-term investors to sell US dollar rallies.

“We expect a 5%-7% US dollar decline over the next 12 months, with the euro, Australian dollar and British pound being the primary beneficiaries. There may be a more difficult passage for emerging-market currencies that are sensitive to an uneven global recovery and idiosyncratic risks, ” it says.

Viable alternative

Similarly holding a bearish view on the US dollar, Nomura says it expects the greenback to follow a path of reduced dominance and weaken over the long term.

In its recently released report titled “The World After Covid-19”, the multinational brokerage projects the US Dollar Index (DXY) to see a sharp depreciation of up to 20% in the coming years.

“Macro drivers include the significant deterioration of the US twin deficits, scope for European Union fiscal coordination, the undermining of the US dollar by US President Donald Trump through verbal and potential policy actions, and substantial foreign exchange (FX) overvaluation, ” Nomura says of what will lead to the weakness of the greenback.

“However, there are other developments that could reduce the role of the US dollar, some of which are structural, such as deglobalisation, yuan internationalisation, digital FX, Bitcoin and Facebook Libra, ” it adds.

Nomura also points out that the end of the US dollar’s role as the world’s reserve currency has long been foretold, but it has yet to materialise due to the lack of a viable alternative. For instance, it notes, the greenback accounted for 88% of all global FX trades last year, up from 85% in 2010.

Nevertheless, Nomura says, the process of creating a viable alternative is gathering momentum, thanks to innovations from other global central banks and private financial institutions.

“Combined with worsening fundamentals for the US dollar, the risk over the coming years is not only one of a reduced role, but also what could be a relatively sharp DXY depreciation, possibly 20%, ” it says.

According to Nomura, the US dollar is overvalued by an average of 17.5%. The greenback on the real effective exchange rate model is overvalued by about 22%, while on the fundamental equilibrium exchange rate model, it is currently overvalued by about 15%.

Positive for emerging market

A weakening US dollar, Nomura says, will provide some breathing space for emerging-market currencies, especially those of countries with sizeable current account deficits. This is because they tend to be more vulnerable to capital outflows and hence, FX volatility.

The brokerage expects in a world of low interest rates in developed markets and ample liquidity due to global central bank easing, investors will be on the lookout for economies that offer higher risk-adjusted returns.

“Emerging markets, which offer a relative growth advantage, could benefit from such easy developed-market policies, by tapping low cost funds for high-return investment projects, ” Nomura says.

StanChart is positive on the FX of Asian emerging markets as US dollar weakness feeds through.

“Gradual emerging market FX appreciation should continue amid a recovery in global growth, easing restrictions and a broadly weaker US dollar, ” it says.

Nevertheless, it reckons a pick-up in US-China trade tensions and an uneven global economic rebound could pose a risk to its optimistic view on emerging-market FX.

Gradual ringgit recovery

On the ringgit, StanChart says further policy rate cuts by Bank Negara could potentially weigh on the performance of the Malaysian note. It points out that the ringgit remains relatively more exposed to external financing shocks.

At present, StanChart expects Bank Negara to keep the overnight policy rate at its current level through 2020. The central bank early this month cut the benchmark interest rate for the fourth time this year by another 25 basis points to 1.75%, the lowest since 2004.

Meanwhile, the longer-term valuations for US dollar to the ringgit remain attractive, StanChart says, adding that this should limit a sharp sell-off in the ringgit, while a stronger-than-expected rebound in commodity prices will bode well for the Malaysian currency.

Year-to-date, the ringgit is among the worst-performing currencies in Asia.

It has weakened by around 4% against the US dollar since the start of the year due to a number of factors, including political uncertainties following the fall of the Pakatan Harapan-led government, and risk aversion amid geopolitical tensions and the Covid-19 pandemic.

The ringgit is currently trading around 4.27 against the US dollar, compared to around 4.09 to the greenback at the start of 2020.

According to Hong Leong Investment Bank (HLIB), the still positive yield differentials between Malaysia and the United States should be supportive of the ringgit over the medium term. A potential return to emerging-market assets as risk appetite improves should also support the local note, the brokerage says.

HLIB projects a gradual improvement in the ringgit, which it expects to end this year at 4.20 against the US dollar, before improving further to 4.15 against the greenback by end-June 2021.

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