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Global equities performance, as measured by the MSCI All Country World Index, increased by 4.7% during the month of December 2023. United States (“US”) equities reported a gain of 4.6%, Europe was 4.9%, and Japan was 4.3% (in US dollar (“USD”) terms) during the same period. Asia Pacific ex-Japan (“APAC”) recorded a gain of 4.4% (in USD terms), with Korea (6.2%), Taiwan (5.3%), Hong Kong (5.2%), and China (-2.6%) in USD terms in December 2023. Within the Association of Southeast Asian Nations (“ASEAN”) countries, Singapore (7.1%) was the best performer, followed by Thailand (5.9%) during the same period (in USD terms).
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KV-malaysia 2022 budget

• In our view, the government is at a razor’s edge in terms of debt sustainability. Fiscal reforms need to start in 2023. The 2022 budget was lacking in this regard.


• The implications for the local currency government bond market in 2022 is that a bear flattening could ensue. While in foreign exchange, the balance of risks is skewed towards MYR under-performing other Asia ex-Japan currencies in 2022.

• From a growth perspective, we favour the consumer sector and projects related to public social sector spending. We remain cautious on the public infrastructure sector. Our 2022 fiscal deficit forecast is 6% of GDP.
Group Chief Economist & Head, Market Research

Dr Sailesh K Jha
+603 9280 8880
dr.jha@rhbgroup.com

Head, Rates & FX Strategy

Dr Suresh Rama CQF
+603 9280 216
suresh.kumar.ramanathan@rhbgroup.com

Head, Fixed Income Strategy

Ahmad Fakrizzaki Ghazali
+603 9280 8858
fakri.ghazali@rhbgroup.com

Senior Economist

Ahmad Nazmi.Idrus
+603 9280 2179
Figure 1-malaysia 2022 budget
Main Implications of the Budget: Near-Term Neutral for Markets, Medium-Term Not Very Encouraging


In 2022, we foresee the possibility of a bear flattening of the local currency bond curve as the government’s options to issue bonds to finance the 2022 fiscal deficit of 6% of GDP is towards the front end of the curve (which so far has been modest in the last few years as shown in Figure 4 and maturing debt remains high in 2022 as seen in Figure 5). Note also that long duration government bonds face external pressures from rising UST10YR yields, which we believe will hit around 2% by mid-2022.

In Foreign Exchange, we expect USDMYR to trade a range of 4.15-4.20 in 4Q21, followed by 4.20-4.30 in 1Q22, and then drop to around 4.15 in 4Q22. Inspite of the aforementioned fiscal risks, the positive factor is that we expect Malaysia to achieve a current account surplus of 3% of GDP in 2022 versus 3.5% in 2021. Hence MYR has quite a bit of cushion to avert significant depreciation pressures against the USD. However, we notice that once currency markets start pricing in fiscal and or political risks, Malaysia 5YR CDS starts to rise and pushes USDMYR up. Hence, while other Asian currencies could appreciate against the USD from 2Q22 onwards at a healthy pace, MYR could under-perform regional peers as the opposing forces of a robust current account surplus in Malaysia and rising 5YR CDS play themselves out.

In our view, markets will remain concerned about the government’s fiscal consolidation path in 2022. Budget 2022 didn’t provide enough details on how the Federal Government Debt to GDP ratio (which is around 63.3% of GDP as of June 2021) could be brought down below 60% of GDP and well below the statutory debt limit of 65%. Nor was the issue of rising debt service charges addressed in any length or the rising liabilities of statutory bodies and non-financial corporations consolidation path laid out in any detail.

At a very high level, we find that Malaysia’s Federal government debt sustainability is at a razor’s edge. This is excluding the depth of issues related to rising public sector debt (which is defined as the sum of Federal Government, Statutory bodies, and non-financial public corporation debt) which stands at 89.5% of GDP (as of June 2021).

Countries which run primary balance deficits like Malaysia (which was at -3.8 of GDP in 2020 and is estimated by the Ministry of Finance (MoF) at -3.9% in 2021 and -3.3% in 2022), experience swings in exchanges rates, rising long-term government bond yields, and trend growth which doesn’t fully compensate for these weaknesses usually have financial markets which under-perform regional peers. In the post-Asian financial crisis era, in the early 2000s, Indonesia and the Philippines come to mind. Is Malaysia headed in this direction in 2022? It’s too early to tell, but the balance of risks is skewed in this direction.

By the MoF’s own calculations, to have a stable debt to GDP ratio of around 65% all the way till 2026, the economic assumptions indicated in Figure 3 need to hold. In addition, the gross financing needs are assumed to fall to 7.1% of GDP from 13.8% in 2021. On trend GDP growth of around 5%, it’s achievable, but this is taking into consideration that no idiosyncratic global or domestic shocks arise in the next 5 years. The primary balance needs to average -2.1% of GDP in the next five years versus the last four years average of -2.6%, and an effective interest rate of 4.3% (which implicitly assumes, in our view, no more than 1-2% annual average depreciation of MYR against the USD), and the trajectory of market interest rates remains benign.

So, examining these very basic parameters of computing debt sustainability, the government has quite limited room to push the envelope in terms of further expansionary fiscal policy. It could do so, but this would come at the expense of much higher long-term government bond yields and a weaker exchange rate.
Figure 2-malaysia 2022 budget
Figure 3-malaysia 2022 budget
Figure 6-malaysia 2022 budget
Economic Impact: Budget 2022 Positive for Consumer Spending and Some Public Investment Projects


Budget 2022 is estimated to generate a more expansionary fiscal impulse compared to 2021. The amount of net spending placed by the budget is estimated to be adding on to aggregate demand, which should further spur growth.

The MOF 2022 budget deficit forecast of 6.0% of GDP is in line with our expectation, and an improvement from the projected 6.5% in 2021. The improvement in the deficit appears to come mainly from the better revenue growth relative to a slower increase in expenditures (taking into account the COVID-19 fund).
  • Few surprises came out from the Budget 2022 speech. Mainly, the introduction of Prosperity Tax (Cukai Makmur) is negative for earnings although positive for fiscal. So far, we have no estimates on the expected collection for the Government yet, however this form of progressive and one-off tax should be neutral for growth.
  • However, there are several incentives which should further support consumer spending. This include the third extension of the sales tax exemption for cars, the continued cash handouts totalling MYR7 bn, as well as generous incentives to promote the purchase of electric vehicles. In addition, several new programme were introduced to further support employment recovery. Of note is the Job Guarantee (JaminKerja) which is another form of wage subsidy with the aim to provide 600 thousand jobs. Various measures to support the agriculture sector and rural infrastructure sector along with measures relating to the Bumiputera community are positive for assisting the B40 segment of the population. These are the income groups most severely impacted by the Covid-19 pandemic and adverse labor market conditions faced by lower skilled individuals. As a result, the government’s objective to reduce the unemployment rate to 4% from the August 2021 reading of 4.8% could be facilitated.
  • The development expenditure is record high at MYR75.6 bn but within our expectations. We are positive on social sector spending. The allocation is consistent with the Government promise to allocate a total of MYR400 bn for 2021-2025 under the 12th Malaysia plan. While the economic sector received the largest portion, the spending in social-related saw the highest growth. This reflects the higher commitment on education and health-related subsector as an outcome of the post-pandemic resilience building.
  • Support to public investment and construction sector was expected but is likely to continue to face implementation risks. New projects such as MRT3 are likely to face delays in tenders going out, while ongoing projects are likely to continue at a reasonable pace.
  • Smaller COVID-19 Fund allocation at MYR23bn versus MYR39bn in 2021. The allocation for wage subsidies and cash handouts will be lower next year, however allocation for other measures are higher including for small scale projects, social assistance to vulnerable groups, as well as SME financing.
  • On the businesses side, few support measures were continued into 2022 namely micro financing, matching grant for crowd funding, as well as several tax breaks and deferments. From our perspective, the measures are generally directed towards the micro-SMEs as they continue needing support despite the economic recovery.
  • Malaysia being a large commodity exporter is helped by robust commodity prices. Hence, the government, taking this dynamic into some consideration, is prudent in raising the threshold prices for the windfall profit levy on palm oil and setting a palm oil levy rate of 3% for Sabah and Sarawak. Other measures, at a sector level, which are positive for the economy include helping the consumer via the auto sector receiving a boost through the tax and duty exemptions for electric vehicles, continued cash handout measures and extension of tax breaks for domestically produced cars.

Although the fiscal deficit is projected to improve, the fiscal consolidation path is readjusted lower under the new Mid-Term Fiscal Framework. The earlier MOF projection for fiscal deficit to average at 4.5% for 2021-2023 is revised to 5.0% for 2022-2024 given the disruption caused by the prolonged COVID-19 pandemic. Through our deduction, with 6% already announced for 2022, the average fiscal deficit in 2023-2024 should average to 4.5% (Figure 1).

On the economics side, the MOF 2022 growth forecast of 6.5-7.5% YoY is slightly more optimistic than ours at 5.5%, although our 2021 forecast is higher at 5.4% versus MOF’s 3.0-4.0%. There are several marked difference in terms of our outlook versus MOF’s:

  • More modest private consumption growth at 7.3% vs ours at 12.2%. MOF stated that growth will be supported by higher disposable income, better employment prospects and improved consumer confidence. From our side, we believe the pent-up excess savings which accumulates during the lockdown is an added stimulus to consumption recovery.
  • Softer private investment growth at 2.6% vs ours at 9.8%. MOF supporting factors include measures to promote quality investments, high-value added, and innovation based industries. We believe this is more on a medium-to-long term policy whereby in the short run, the high capacity utilisation as well as the high demand for goods especially electrical & electronics will prompt business to start to invest in higher capacity or new technologies.
  • Strikingly, public investment is projected to soar to 24.2% vs ours at 3.5%. MRT3 is mentioned in the report as part of a new project (which was not mentioned in the 12th Malaysia Plan document nor in the Budget 2022 speech) on top of the usual continuation of large-scale projects such as the MRT2, ECRL, LRT3, Pan Borneo, and JB-Singapore RTS.

Overall, MOF is less optimistic on the domestic recovery with domestic demand projection lower than ours (Figure 7 and 8). On the flip side, their outlook on external trade is much more positive which helped them to achieve a higher GDP projection for next year.
Figure 11-malaysia 2022 budget
Figure 13-malaysia 2022 budget
Fixed Income Strategy: Supply Pressures Still Intact-Long Duration Risks Prevalent


We view the target fiscal deficits of MYR97bn or 6% as announced in the Budget 2022 to be funded mostly by MGS/GII issuance. As such, our baseline forecast of total gross MGS/GII supply is to grow to MYR173bn next year compared to this year’s estimates of MYR163bn (Figure 15). Most of the infrastructure programme will be financed via the Government-Guaranteed (GG) issuances, in the like of DanaInfra (for LRT, MRT and Pan Borneo), Malaysia Rail Link (for ECRL), PASB (water-related) and PR1MA (people’s housing initiatives).

Our baseline forecast is for the net supply to be around MYR95bnin 2022, largely to fund the Government’s fiscal deficits, while the remaining MYR78bn is to be directed for MGS/GII scheduled maturities in 2022. Higher gross supply is expected to be channelled to fund the development expenditure target of MYR75.6bn, with net supply likely to remain within this year’s level of MYR94bn (Figure 15).

Government may need to smoothen the maturity profile until 2027, given the above-average amount of over MYR60bn of scheduled maturity (Figure 16). Based on the maturity profile, we anticipate more supply of MGS/GII for the next year to be skewed towards the longer end, i.e. 7YR and above, while there is huge gap for the 10YR bucket (of 2032 maturity) to be filled up, apart from the longer tenor of 15YR and above.

Government may need to smoothen the maturity profile until 2027, given the above-average amount of over MYR60bn of scheduled maturity (Figure 16). Based on the maturity profile, we anticipate more supply of MGS/GII for the next year to be skewed towards the longer end, i.e. 7YR and above, while there is huge gap for the 10YR bucket (of 2032 maturity) to be filled up, apart from the longer tenor of 15YR and above.

Most of the infrastructure programme is to be financed by the Government-Guaranteed (GG) issuances, which we pencilled a baseline total gross issuance of MYR35bn or 8% net increase to the total outstanding in 2022 (Figure 17). DanaInfra set to raise more sukuk for the LRT3, MRT and Pan Borneo Highway projects (Figure 18), while other issuers such as Malaysia Rail Link (for ECRL), PASB (water-related) and PR1MA (people’s housing initiatives) are all expected to ride on the existing programmes. We could also expect the maiden issuance of telecommunication-related GG via Digital Nasional Berhad (DNB) for the nationwide deployment of fifth-generation (5G) network to fulfil the digital economy objectives under the 12MP. To recap, DNB has appointed Ericsson (Malaysia) Sdn Bhd to design and build its 5G network at a total cost of MYR11bn, under the 10-year partnership agreement in July 2021.
Figure 15-malaysia 2022 budget
Figure 17-malaysia 2022 budget
Foreign Exchange Strategy: USDMYR Will Eventually Head Higher


We believe in coming weeks positioning of USD longs against the MYR to be gradually reduced, giving the MYR to test key support level of 4.1200 before rebounding. We note market positioning of USD against MYR as reflected by Refinitiv data for the week ending October 21st shows USD longs against MYR is being reduced to +0.1 from +0.3 in the previous fortnight.

Over the next few weeks, USDMYR will remain in the 4.15-4.20 range in 4Q21, before rising to 4.20-4.30 in 1Q22. We believe the market is still positioned for Taper Framework by the US Fed and this should provide the USD broad based strength against G10 and Asian FX, thus our trajectory for USDMYR weakness to peak in 1Q22 at 4.30 remains.

The immediate reaction to budget 2022 was USDMYR trading lower towards 4.1370 and continued to be on a bid tone at the Asia close on October 29 (Figure 19). The FX market had priced in a deficit of 6.8-7.0% of GDP in 2021, and the fiscal deficit this year coming in at 6.5% has provided positive impulse for the currency. We expect USDMYR to trade within 4.120-4.150 in the next 1-2 weeks as the currency market soaks up the positive impulse of a larger budget for 2022 and a smaller fiscal trajectory in 2022 of 6.0%. A firmer MYR in the near term should attract flows from importers and increase in hedges by exporters.
Figure 19-malaysia 2022 budget
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This report is prepared for information purposes only by the Economics and Market Strategy division within RHB Bank Berhad and/or its subsidiaries, related companies and affiliates, as applicable (“RHB”).

All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness.

Neither this report, nor any opinion expressed herein, should be construed as an offer to sell or a solicitation of an offer to acquire any securities or financial instruments mentioned herein. RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for any direct or consequential loss arising from the use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose without prior consent of RHB and RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for the actions of third parties in this respect.

Recipients are reminded that the financial circumstances surrounding any company or any market covered in the reports may change since the time of their publication. The contents of this report are also subject to change without any notification.

This report does not purport to be comprehensive or to contain all the information that a prospective investor may need in order to make an investment decision. The recipient of this report is making its own independent assessment and decisions regarding any securities or financial instruments referenced herein. Any investment discussed or recommended in this report may be unsuitable for an investor depending on the investor’s specific investment objectives and financial position. The material in this report is general information intended for recipients who understand the risks of investing in financial instruments. This report does not take into account whether an investment or course of action and any associated risks are suitable for the recipient. Any recommendations contained in this report must therefore not be relied upon as investment advice based on the recipient's personal circumstances. Investors should make their own independent evaluation of the information contained herein, consider their own investment objective, financial situation and particular needs and seek their own financial, business, legal, tax and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

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