It’s undeniable that Malaysia and Singapore share a close relationship and events that affect one country tend to affect the other. We take a look at the 2015 Malaysia Budget and pick out some key points.
Every day, close to 300,000 commuters cross the Johor-Singapore Causeway and the Tuas Second Link for a variety of reasons. That’s an average of 12,500 people passing through the immigration checkpoints every hour, which is an amazing amount of foot traffic. Singapore also counts Malaysia as one of its closest trading partners – Malaysia is Singapore’s second largest exporter of goods and services while the little red dot that could is Malaysia’s largest importer, according to Trading Economics. Malaysia and Singapore are also heavily reliant on each other for the important commodity of water, thanks to the 1962 Water Agreement.
Whether Malaysians or Singaporeans like it or not, both of their country’s economic fortunes and subsequent successes are tied to one another.
In an earlier article, we explained why Malaysia’s depreciating ringgit – a consequence of falling crude oil prices – could potentially be a bad development for Singapore.
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Similarly, the revisions to the 2015 Malaysia Budget outlined by the Malaysian Prime Minister Datuk Seri Najib Razak a few days ago, in response to the falling crude oil prices, contained a few interesting points that could affect Singapore.
A Quick Primer of the 2015 Malaysia Budget
Malaysia is incredibly dependent on petroleum income – close to a third of the government’s revenues in 2013 came from oil-related exports and amounted to a grand total of RM63 billion. When the 2015 Malaysia Budget was first tabled on 10 October 2014, the proposals were crafted with the assumption that crude oil prices would remain at US$100 a barrel throughout the year. Unfortunately, after a series of unprecedented events and strange decisions fuelled by the threat of cutthroat competition, crude oil prices tumbled through the floor. Today, it’s hovering around the US$50 mark.
The price decline prompted the Malaysian state economists to head back to the Budget drawing board. Sticking stubbornly to the original plan would have resulted in a massive fiscal deficit that would probably have taken years to rectify.
Interestingly, PM Najib put paid to the perception that Malaysia’s export receipts will be taking a beating due to falling crude oil prices. “As a net crude oil exporter, we had a surplus of RM7.7 billion from January to November 2014. However, we are an importer of petroleum products with a net import bill of RM8.9 billion during the same period. If we include both crude oil and petroleum products, we are actually a net importer with a deficit of RM1.2 billion. Crude oil exports account for only 4.5 percent of total exports,” explained the PM in a televised speech to the Malaysian citizenry, in a clear attempt to downplay the adverse impact of global economic conditions.
In the same speech, the Malaysian PM also announced a slew of measures and cuts, targeted at narrowing the budget deficit. These included a suspension of the country’s National Service (savings of RM400 million), a review of the government’s overseas and professional services expenditure (savings of RM1.6 billion) as well as its transfers and grants to statutory bodies, government-linked companies and trust funds (savings of RM3.2 billion), and more.
Impact on Singapore
PM Najib also announced a bunch of carrot-like initiatives. It’s clear from the revisions and new measures that the Malaysian government is trying to encourage its people to spend, spend, spend, especially on locally made products. PM Najib is doing so by intensifying promotions on “Buy Malaysia” products, encouraging competitive domestic flight fares, and increasing and extending the frequency and shopping hours of nationwide mega sales.
For Singaporean visitors to Malaysia, this is great news. Analysts are forecasting that the ringgit will continue remaining weak in 2015 due to the lower GDP growth forecast and a higher fiscal deficit, which means that the Singapore dollar will stretch even further when you head up north. And in consumerist Singapore, when you combine the stronger Singapore dollar with the fact that there will be more delicious sales, it means that Malaysian retailers can expect more Singaporeans to fill up their coffers and increase their revenues.
Here’s the somewhat under-publicised revenue generating measure introduced two years ago in 2013 that makes these initiatives pay off – a 6 percent Goods and Services Tax that is coming into play in April 2015. The government won’t be implementing the new GST taxes on certain essential goods and services such as cooking oil, sugar, and electricity. However, shoppers will now have to pay just a bit more on their luxury handbags or clothes, and the government is expected to earn an additional RM30 billion in taxes annually, if not more.
Malaysia’s over-reliance on oil to prop up its economy would not have come to the forefront if not for the current oil crisis. Fortunately, it occurred during a time when the blow would be somewhat cushioned by the new GST. And now, the revisions indicate a willingness by the government to reshape the traditional pillars of the economy to make Malaysia more competitive and at the same time, making her insular to external forces beyond her control.
With the new emphasis on spending and attracting tourism dollars, it’s quite apparent that the Malaysian government is hoping to make up the budget shortfall caused by the drop in oil-related exports with consumerism. PM Najib is also introducing capital allowances to increase automation in labour-intensive industries as well as incentives in technology, innovation and knowledge investments. It’s a subtle shift from a traditionally commodity-driven economy to one powered by services, innovation, and knowledge. And it’s been a long time coming.
If Malaysia continues on this path, Singapore, the financial services hub of Asia and the world powered by knowledge and soft skills, might have to start looking over her shoulder.