Rising Fiscal Risks in the Wake of Pandemic Recovery

KEYNOTE ADDRESS

YB SENATOR TENGKU DATUK SERI UTAMA ZAFRUL AZIZ MINISTER OF FINANCE

MOODY’S INSIDE ASEAN SERIES:
Rising Fiscal Risks in the Wake of Pandemic Recovery

22 MARCH 2022 | 3:00 PM

Thank you Christian for the warm welcome and introduction, Ladies and Gentlemen,

A very good afternoon to everyone.

1. First and foremost, I would like to thank Moody’s for inviting me to this year’s Inside ASEAN, as well as the opportunity to speak here today. Please allow me to share some of Malaysia’s development highlights.

ECONOMIC PROGRESS

Ladies and Gentlemen,

2. After a strong rebound in 2021, the global economy is expected to slow significantly in 2022 due to threats posed by new COVID-19 variants, rising inflation, on-going geopolitical tensions, rising debt, and income inequality. As a result, growth is expected to decelerate from 5.5 percent in 2021 to 4.1 percent in 2022 as pent-up demand dissipates and world governments unwind fiscal and monetary support.
   
   
3. For Malaysia, after nearly two challenging years since COVID-19 hit our shores, 2022 must be a year of not only recovery, but also reform.
   
   
4. After expanding by 3.1 percent in 2021, Malaysia’s economy is on track to recover further this year, with GDP expected to increase by 5.5 to 6.5 percent, in line with IMF (5.7%) and World Bank (5.8%) forecasts.
   
   
5. This will be based on:
   
   
   1. our 332.1 billion ringgit expansionary Budget 2022, which will provide impetus for longer-term reforms and prevent further economic scarring by focusing on job creation and business revitalisation;
      
      
   2. success in our vaccination programme where close to 80 percent of the adult population has been fully vaccinated, with over 15.3 million booster doses administered, this equates to more than half of the adult population;
      
      
   3. resumption of all economic and social activities;
      
      
   4. the reopening of our international borders, as well as the gradual transition to an endemic phase beginning on April 1st;
      
      
   5. improvements in our labour market, consumer and business sentiments, as well as on-going policy support for vulnerable groups and affected businesses; and
      
      
   6. stronger external demand, particularly from our major trading partners, as well as the increased demand for electrical and electronics products and major commodities.
      
      
6. Furthermore, we have seen signs of further recovery, which is expected to continue throughout this year. This includes:
   
   
   1. a record 300 billion ringgit in approved investments last year, representing an 83 percent increase over 2020, led by the manufacturing sector;
      
      
   2. net FDI inflows of close to 55 billion ringgit in 2021, exceeding the amount recorded during pre-pandemic years;
      
      
   3. government revenue collection, which increased to a record of more than 230 billion ringgit by the end of last year, contributed by Corporate Income Tax, export duties and levy on palm oil;
      
      
   4. total external trade of more than 200 billion ringgit in January this year, an increase of close to 25 percent, with trade balance remaining in surplus; and
      
      
   5. strong international investor interest in our capital markets, with net inflows of 6.6 billion ringgit in our ringgit bond market, and close to 5 billion ringgit in our equity markets year-to-date.

A YEAR FOR REFORMS

Ladies and gentlemen,

7. We are committed to addressing Malaysia’s long-term growth drivers, such as talent development, as well as larger threats, like climate change and widening income disparities.
   
   
8. And our aspirations begin with the Twelfth Malaysia Plan’s announcement of our goal of becoming a net-zero nation by 2050. Our policies, programmes, and projects focusing on this goal will remain aligned in order to achieve balance, and streamline the transition towards low-carbon activities.
   
   
9. One of the key drivers is the establishment the Joint Committee on Climate Change by Bank Negara Malaysia and Securities Commission to propel financial institutions and capital markets to steer the changes by introducing among things, the Principles-based Taxonomy.
   
   
10. These efforts have also assisted the financial and corporate sectors to integrate environmental, social and governance (ESG) considerations into their investment decisions, paving the way for a more sustainable future.
    
    
11. In complementing this effort, we have also launched the PLC Transformation Programme, which aims to catalyse listed companies’ performance and growth, while also aligning them with the latest global trends, investor demands, and stakeholder expectations.
    
    
12. Infact,variouspartiesinthecountry,whetherGovernmentorprivate sector, have implemented various initiatives as part of the country’s efforts toward the sustainability agenda. These include:
    
    
    1. Bursa Malaysia’s development of the Voluntary Carbon Market, as announced in the 2022 Budget;
       
       
    2. Bursa Malaysia's commitment to achieve carbon neutrality by the end of 2022, and zero net emissions by 2050. Petronas, our country's leading oil and gas company, has also pledged to achieve zero net by 2050;
       
       
    3. the formation of a CEO Action Network by Malaysian corporate leaders in order to accelerate sustainable business practices, and set a good example in the transition to a clean, zero-carbon economy;
       
       
    4. prioritisation of the country's financial sector in lending and investing in initiatives with a focus on sustainability. In fact, the Government encouraged the banking sector to sign up to the UN Principles of Responsible Banking, join the Net Zero Banking Alliance; and
       
       
    5. commitments made by the country’s Sovereign Wealth Fund and Institutional Investors through the UN Principles for Responsible Investment, where they are also encouraged to be part of the Net Zero Asset Owners Alliance.
       
       
13. Overall, these efforts represent a whole-of-nation approach that will pave the way for a more sustainable future for Malaysia. It will also contribute to the development of a more comprehensive and sustainable financial industry in the country, while also complementing the Government’s efforts to achieve the SDGs.
    
    
14. Meanwhile, efforts to strengthen the financial and capital markets continue with the release of the new Capital Market Master Plan and the Financial Sector Blueprint, which are aimed at meeting business financing needs and rebuilding the economy.

Ladies and gentlemen,

15. Our fiscal stance will remain expansionary this year to ensure that the recovery momentum is maintained, economic scarring is minimised, and the economy returns to its medium-term growth trajectory.
    
    
16. As a result, the pace of our consolidation will be gradual. We achieved a 6.4 percent deficit in 2021, and we are confident that we will meet our 6 percent target this year, or even lower, given the potential revenue upside from higher commodity prices, as well as the recent tax revenue collection, which has nearly recovered to pre- pandemic levels.
    
    
17. Meanwhile, the Federal Government’s debt is expected to reach 66 percent of GDP by the end of this year, while statutory debt is estimated to be 63 percent, well below the debt ceiling of 65 percent.
    
    
18. We will continue to prioritise domestic market issuances, including the launch of a ringgit-denominated SDG instrument this year, with a targeted size of up to 10 billion ringgit. Accommodative monetary policy and a large domestic investor base will continue to support the Government’s funding needs.
    
    
19. To accelerate the resumption of fiscal consolidation and ensure our debt affordability remains manageable, the Government has undertaken efforts to implement additional reforms as we aim for a deficit of 3 to 3.5 percent by the end of 2025.
    
    
20. This will be anchored by the introduction of the Fiscal Responsibility Act, which will ensure fiscal governance and medium-term sustainability, as well as the adoption of the Medium-Term Revenue Strategy and the Public Expenditure Review.

CONCLUSION

Ladies and gentlemen,

21. Malaysia’s recovery and reform story, guided by our 2022 Budget and the Twelfth Malaysia Plan, is based on the concept of a whole-of- nation approach. All stakeholders will have a role to play in helping to build a better future for our nation.
    
    
22. I recognise that the future will continue to be challenging. Malaysia’s resilience will be put to the test more than ever. However, I am confident that Malaysia’s open, trade-oriented, and competitive economy will continue to grow sustainably, becoming more resilient with each challenge it faces.
    
    
23. On that note, I would like to thank Moody’s once more for inviting me to provide a brief overview of Malaysia and where we aspire to be in the future.
    
    
24. Thank you for your time and attention, and I wish you a fruitful discussion ahead.

END