Malaysia preps post-pandemic budget with eye on possible polls next year

Prime Minister Ismail Sabri Yaakob, who took office in August, has agreed not to dissolve parliament before the end of July 2022 as part of a cooperation pact signed with the opposition in order to maintain political stability as the country recovers from the COVID-19 crisis.

The deal includes a commitment from opposition lawmakers to support or abstain on the government's 2022 budget.

Malaysia cut its outlook for the economy twice this year as fresh COVID-19 curbs dampened its recovery, and it now expects growth of 3-4% in 2021, down from an earlier projection of 6-7.5%.

In a pre-budget statement in August, the Finance Ministry said it would focus on post-coronavirus recovery and reforms, as well as providing support for people and businesses affected by lengthy lockdowns.

Analysts expect higher development spending in 2022, signaled by the government's pledge last month to allocate 400 billion ringgit ($96.4 billion) for new and existing projects over the next five years.

The government could also set aside contingency funds given uncertainties around the pandemic and the likelihood of an election being called next year, Kenanga Investment Bank said in a note. Malaysia's next polls are due by 2023.

The finance ministry expects its 2021 fiscal deficit to widen to between 6.5% to 7% of gross domestic product and has raised its statutory debt ceiling to 65%, amid additional COVID-19 spending.

It is also considering measures to improve tax compliance and address leakages, with this year's revenue expected to be lower than projected.

The government could seek higher dividend contributions from state-owned companies, including national oil firm Petronas, to address the revenue shortfall going forward, economists said.

Malaysia, one of the world's largest exporters of liquefied natural gas, has benefited from a recent surge in global energy prices.

"Indeed, if the recent commodity price run continues, a special dividend from Petronas might well form one of the key planks of the government’s revenue strategy next year," OCBC Bank economist Wellian Wiranto said.