CGS-CIMB Securities Sdn Bhd said the government revenue collection up to June was slightly better than past trends despite expenditure data so far remaining in line.
“As a result, the fiscal deficit was recorded at 2.2% of GDP for the first half of 2023 (H1 2023).
“If we extrapolate the trend, this may indicate the possibility of the fiscal deficit coming in better than the government’s target of 5% of GDP for this year,” it said in a research note today.
However, CGS-CIMB cautioned against excessive optimism despite the encouraging year-to-date (YTD) fiscal performance.
It reckoned that expenditure could balloon in H2 2023, given the announcements related to electricity tariff subsidies, chicken and egg price subsidies, and new cash handouts.
“Regardless, assuming the fiscal situation does get better, the government may have three strategic options, (namely) opting for a lower fiscal deficit than the estimated 5% of GDP, (giving) more space for expansionary fiscal manoeuvres if it decides to maintain the deficit target, and reducing the need for the introduction of major taxes in Budget 2024, (given) a better fiscal situation.
“Thus far, we are more inclined to maintain the fiscal deficit forecast of 5% of GDP this year,” it said.
Strong O&G revenue
CGS-CIMB stressed that the majority of the outperformance in YTD revenue collection stemmed from the oil and gas (O&G)-related revenue.
Collections from petroleum income tax in the first quarter (Q1 2023) was 28.2% of the annual budget, surpassing the historical average of around 16%.
Similarly, collections from petroleum royalty during the same time were strong at 84.4% of the year’s budget.
“We think a major part of the upside came from currency devaluation. Budget 2023 projects the US dollar/ringgit pair at RM4.40, while the year-to-date average (stands at) RM4.50.
“A weaker currency allowed for translation gains for O&G products. Based on our calculation, this led to an increase in overall revenue of more than RM660 million,” it said.
On the expenditure side, CGS-CIMB emphasised that YTD’s performance as of June 23 was in line with past trends, despite slight changes observed in the expenditure subcomponents.
Subsidies as of Q1 2023 were low at 15.8% of the total annual budgeted amount versus the average of 26.1%.
“We suspect the cause was the falling of commodity prices since the early part of this year, leading to lower spending on fuel, cooking oil, and other consumption goods compared to what the government may have projected.
“On the other hand, development spending was rather robust in Q1 2023, reflecting the redemption of the US$3 billion (RM13.77 billion) 1Malaysia Development Bhd bond that was due in March this year,” it added.