This article first appeared in The Edge Malaysia Weekly on November 30, 2020 - December 6, 2020

IN his current job, Finance Minister Datuk Seri Tengku Zafrul Aziz seems to be cycling uphill against a strong headwind in the cold night.

Formulating an expansionary budget with a tight fiscal position to lift the nation out of an unprecedented economic and health crisis is already a challenge for the former banker. An added hurdle is that the current government does not have a strong majority in parliament to enable the proposed budget to be passed and executed swiftly.

The demanding job specification spurred Zafrul to work harder than ever before. “It has been crazy. My team slept here at the Ministry of Finance (MoF) for several weeks in the run-up to the budget speech. Many of us survived on four hours of sleep per night over the last month,” he tells The Edge in an interview.

Zafrul’s efforts paid off as the budget was passed at the policy level in the Dewan Rakyat last Thursday. He sees that as the “most important milestone”. Still, the budget will be debated and voted on at the committee stage in December before being sent to the Senate for the final vote. Despite Opposition leaders saying that they will continue to challenge the budget in the coming week, Zafrul seems hopeful that the proposals will be pushed through. When asked if he is expecting any problems at the committee level voting, he replies candidly: “Oh, that one I dont know.”

Budget 2021 is not only the largest budget historically, but it is also one of the most contentious in recent history. It’s a budget in the midst of a global pandemic as well as a local political crisis.

On top of that, Budget 2021 is also the first time in recent memory that the finance minister has had to make additional allocations based on feedback from MPs from both sides of the aisle to get it passed at the policy stage.

He fine-tuned the proposed budget by adding an extra RM500 million to the final figure of RM322.5 billion — the largest in history — without widening the fiscal deficit. “RM500 million is not demanding in the context of RM322.5 billion. Even with this improvement, it is small enough to ensure that our deficit remains at 5.4% next year,” explains Zafrul, who did not give in to the Opposition’s demand for a blanket loan moratorium.

While the government is spending to stimulate growth, concerns about a possible tax hike to replenish the nation’s coffers arise. Zafrul thinks this is something the government needs to tackle when the domestic economy returns to the recovery path, but it is not the priority now.

Nevertheless, studies on tax revenue measures have started. “The expansion of the tax base is something that is being explored, but the timing is important. We have to take into account the people, economy, cost of living, price of goods and other factors. So, that has to be done properly,” he says.

On the hotly debated topic of the Employees Provident Fund (EPF) withdrawals, Zafrul has proposed allowing members who have suffered pay cuts to apply for the i-Sinar facility, with a maximum withdrawal of RM10,000 from Account 1. MoF estimates that the move will enable eight million EPF members to tap their retirement savings, expecting an outflow of RM45 billion to RM50 billion..

Does this mean EPF will have to rebalance its portfolio by selling some assets to meet the withdrawals? “If there is a need for EPF to rebalance its portfolio, it will be done in an orderly manner. So, there will not be any adverse impact on its long-term strategy on markets,” says Zafrul.

The following are highlights from the interview with the finance minister last Friday afternoon.

The Edge: It looks like the government gave in to many, if not all, of the demands made by MPs from both sides of the aisle in order to get the budget passed at the policy level. Must have been a tough decision …

Tengku Datuk Seri Zafrul Aziz: It was not a tough decision. If you look at it, we listened to all the requests in the debate and the requests made by both sides.

Some of the requests are actually fair and it’s an easy decision. Like, for example, to the frontliners. It’s not just the Ministry of Health frontliners but also the others who are involved directly under Nadma (Agensi Pengurusan Bencana Negara). The police, some of the army.

In my speech yesterday, I admitted that nobody can make a budget that is perfect, right? That is why the whole focus [is] on the debate.

If you look at the context of the budget, it’s totally RM500 million, which is not demanding in the context of RM322.5 billion. Even with this improvement, it’s still small enough to ensure that our deficit remains at 5.4% next year.

Where is this funding coming from? There is the Contingency Fund Advance Warrant (CFAW), and we have CRAW, which is the Contingency Reserve Advance Warrant.

For operating expenditure, it’s RM1.5 billion for contingency, and for development expenditure, it’s about RM2 billion. This gives the minister of finance the authority to use within that amount and that’s about RM500 million.

This allocation announced shows that we don’t just listen but we also respond.

During a crisis, during these trying times, we should show a bit more openness … and admit that if there are improvements suggested, we should take them into account.

What’s the total budget figure?

It is still RM322.5 billion … if you look at it (RM500 million), in terms of deficit, it’s too small to have an impact on the budget deficit but, in absolute terms, it would mean that I will need approval in the supplementary bill.

I have a contingency of RM1.5 billion OE (operating expenditure) and RM2 billion in DE (development expenditure), which means I’m authorised to use that amount and get approval later.

When is this approval?

Every year, there is a supplementary bill. I will get the approval then — it’s the next parliamentary session and that’s next year. It’s RM500 million for the people, which can be spent first, if really necessary.

The budget was passed at the policy level and there’s still the committee level. Is that correct?

Yes, passed at policy level and at committee level, we go by ministry. There are 27 ministries, if I’m not mistaken. So, that’s 27 times of voting, but those are just only focusing on the lined items. It’s not about policy anymore. It’s not a dewan in session. The committee level is where the Speaker becomes the chairman, not the speaker.

So you’re not expecting any problems at that level?

Oh, that one I don’t know (laughs).

Opposition leader (Datuk Seri) Anwar Ibrahim is saying that it doesn’t mean that they voted for the budget. We also reached out to Banting MP Ong Kian Ming and he is saying the budget has not (been) passed yet.

It’s true. Because the budget has to go to the Senate also after that. Technically, he is right. So, after that it goes to the Senate, and the Senate can reject the budget also. So, there are still a lot of levels.

But let’s see. The most important milestone was the first one. At least, we got the first one passed.

There has to be a reason why it cannot pass certain line items — and you know which ones — that people are not happy about, like JASA (Jabatan Hal Ehwal Khas), for example. I have announced that I will reduce it. But some may think it’s part of the repurposing/rebranding, they want it completely off … let’s see.

How much are you cutting from JASA?

I’m still in discussion with the minister. His session is on Wednesday, so by Wednesday, we need to decide how big a cut [it] is.

This cut, is it to facilitate the additional spend that was announced yesterday?

No, how it works is that if you cut, you cannot repurpose it.

Then you cut and then the budget allocation is lower.

Yes, but that’s RM80 million.

Are there any other cuts, or just JASA, that you’re looking at?

So far, there’s only one that has been requested by both sides, actually. So, yesterday, I raised the motion to cut from JASA’s side to show our sincerity.

This is by far one of the toughest budgets to pull off as we are in the midst of a pandemic, among other things. How would you describe this balancing act?

When you say balancing act, it is always checks and balances as well. In this new world, we’ve got to learn to live with these checks and balances. Which is good because no one is perfect. The budget itself is not perfect. If there are improvements, we should take to it. The economy is moving so fast and the crisis is making it move even faster, so we need to be very agile when it comes to policymaking, moving forward.

My concern is, it’s very easy to be caught in short-term thinking during a crisis. You know, how many numbers are infected today … people tend to be glued to the TV looking at that without realising that we need to look at the medium to long term as well.

Our health service has been quite good, to be fair. It is well funded. My point here is, going forward, we will not compromise on public health.

Like in the Covid-19 Fund we put RM1.8 billion [into] this year; next year, we are committing another RM1 billion and I’m asking parliament to give me some more money for the vaccine, for another RM3 billion.

You’ve said this budget is for survival and resilience. Given the expanded scope of the budget of RM500 million and the tough operating landscape with continued prolonged uncertainty, you’re saying the deficit will be 5.4% in 2021 ... but how long can we be in this state? Can you share your projections on when you expect to see Malaysia’s deficit back to the 2019 level?

1% deficit is RM15 billion. 0.1% is RM1.5 billion. So, RM500 million is less than 0.1%. So, that is why the deficit won’t move so much.

It’s a big number in absolute terms but in [terms of] the size of the economy of RM1.5 trillion, then it becomes very small. In fact, it doesn’t even touch 0.1% of the deficit. So that’s why we are confident it will still be in that range. Of course, it depends on the GDP numbers at the end of the day.

I have mentioned before that during the GFC (global financial crisis), our deficit was higher at 6.7%. The government, with discipline, had managed to reduce it to 2.9% in 2017. So right now, the focus is not so much on deficit per se but to have a medium to long-term target for the deficit.

Our role is to do whatever it takes to contain Covid-19 in the short term, safeguard public health and also support businesses to uplift the economy because we need to do both at the same time.

The fiscal deficit target of 5.4% has also incorporated another part. Is the Covid-19 Fund outside the deficit? It’s not, it is within.

The RM45 billion + RM10 billion Covid-19 Fund = RM55 billion is actually inside the budget as well.

What this means is that the RM55 billion is until the end of 2022. That’s what my target is, to reduce the debt ceiling to 55%. So this is one-off.

I don’t know if people notice that we put all the Covid-19-related matters, which are one-off in nature, into a separate trust account. To instil that discipline.

If you put it into the normal budget book (OE/DE), then people might say, “this is my new base”.

To prevent all this new baseline for the budget, I’ve put it in a specific trust fund called Covid-19-related Fund.

So, in the medium term, our deficit target for 2021-2023 is around 4.5% of GDP, but this is based on the current tax framework.

There is this question — if you introduce new taxes, would it go lower? I’m assuming a 4.5% deficit even in the current tax framework. But we want to reduce this fiscal deficit to 4% in three to four years.

But how we get there hinges on global recovery, growth. Malaysia, being a trading nation and export-oriented economy, will be heavily dependent on the global recovery.

But the good news for global recovery ... it seems that they are very optimistic about this vaccine. It’s coming earlier than expected and commercially, so that’s good. Malaysia would be making some big announcements on this as we are part of that group.

We also have this steering committee [of] MoF working together with the IMF (International Monetary Fund) on this medium-term fiscal policy framework. We want to develop aspects such as financial management, planning and fiscal consolidation. This is actually in line with practices in the UK, the US, Japan, New Zealand and Australia.

You mentioned that you had conversations with the IMF and the World Bank. On the ground checks have revealed that there is worry of a potential ratings downgrade should our economic recovery and GDP fall short of expectations. In your opinion, how real is this risk?

On the rating agencies, I spoke quite soon after the budget presentation that happened on Nov 6. If you look at Malaysia’s sovereign ratings, when I spoke to them, a key focus of the rating agencies was to ensure that Malaysia’s growth continues to be strong. I have spoken to all three — Moody’s, Fitch and S&P.

If you look at countries in the same A-rating category, Malaysia is there also because of the strength of our economic growth. Our sovereign rating is always being supported by strong growth resilience and also policy credibility on our commitment to medium-term fiscal consolidation efforts.

So, that’s why those two key points are important — where will the GDP growth be for the next couple of years and where is our fiscal position going to be in the next couple of years?

They know next year is a transition year, not just [for] us but globally. The narrative has to be clear about our growth in the [next] three to five years ... must be the 5% to 6% kind of growth because the other A-rated countries are only 1% to 2% growth.

If you look at [our] A-rated peers, [they have been growing at] about 2.8%, whereas we have been growing at an average of 4.9% over the past five years. So, that is what gets us in the A-rating category, and at the same time, our track record of maintaining a strong fiscal policy right after a crisis. Like the GFC, it was 6.7% and went down to 2.9%.

Similarly, this time around, we must show that we can do the same. But having said that, all the three credit rating agencies have undertaken more than 100 downgrades. They have done 100 downgrades and 100 negative outlook revisions and the majority of them have been Covid-19-driven. We’ve been fortunate that we are not on that list but we also have to be careful at the same time.

We need to have more targeted fiscal spending. The increase in government debt remains contained right now compared to other A-rated peers. We are not alone. In fact, others are spending even more. But if you look at our government debt, we are still quite high. If you look at the A-rated median, it is around 49%. We, as you know, are around 50%+ now. End of the year, it’s 56%. So we need to be careful on that one. Although they [our peers] are spending more, but their debt to GDP is still below 50%.

The other point is, if you look at where our borrowings are, more than 95% of our debt is ringgit-denominated, so there is no shock from any rating downgrade.

So, for our debt, will we borrow more?

I think we need to borrow more. If you look at our big budget next year of RM322.5 billion and the revenue is not going to come back so fast given that the economy is expected to grow gradually — even the debt service coverage ratio will increase. But this is cushioned by lower cost of borrowing and we don’t have so much forex risk as well.

We look at our DSC (debt service coverage) — we usually have it below 15%. That is self-imposed discipline … before the crisis, but after the crisis, we will breach that 15%.

The highest we’ve ever been was during the post-commodity crisis ... 85/86 ... The DSC ratio reached about 32% of revenue. But I don’t want to go there.

So, where are we now, post-crisis?

We have exceeded the 15%.

How much of an increase do you see the DSC increasing?

Annual DSC increase is roughly RM2 billion to RM3 billion, on average. For 2021, it will most likely reach the upper end of the limit due to additional borrowing to finance our various stimulus packages. What is more important is our medium-term fiscal consolidation and discipline in bringing it back to pre-Covid-19 level.

And how much more do we need to borrow?

That’s the amount detailed in the 2021 Supply Bill (Budget 2021), that is, the fiscal deficit, but we are tapping the local market and it will all be domestic borrowings.

Local market ... more bonds?

Yes, MGS (Malaysian Government Securities).

This economy we need to grow … this budget is a counter-cyclical budget, so that’s why the deficit will go up. In absolute terms, the borrowing will go up. But in terms of deficit, it will go down because the GDP is expected to go up. So, the denominator goes up, therefore the deficit goes down.

You mentioned that revenue is a number that is crucial. Looking at tax collection data, how can your targets be achieved? Because there are expectations that companies will be making less profits and people will be getting pay cuts.

There is a reason why we have crafted a counter-cyclical budget: it’s to create jobs and create demand to grow supply. We need to spend our way out of this recession, which is what other countries are doing, and I think they’ve learnt from the previous GFC … those that did spend their way out of recession recovered faster than those that didn’t.

How are we going to do this in Budget 2021?

There are three ways when it comes to revenue. First, we need to increase the cash flow of people and businesses. By improving cash flow, there will be more economic activity. Second is direct financial assistance … means the money we have given to the vulnerable sectors — the B40 and some of the lower M40 — that’s about RM30.8 billion. There is a GDP impact to that.

And thirdly, we want to create 500,000 jobs and reduce the unemployment rate.

This RM322.5 billion is expected to have an impact to GDP of 4%.

Revenue collected this year is about 20% lower than the target earlier … so that people understand why the borrowing ratio went up … because collection has gone down 20%. Looking at the numbers, the past measures like Prihatin and Penjana have supported many jobs — about three million jobs through wage subsidies, hiring, reskilling and upskilling subsidies.

The unemployment rate went down from 5.3% to 4.6% in about four months. It is important. That’s 2020.

If you look at 2021, in terms of revenue, tax from individual taxpayers to percentage of GDP is about 2.6%.

2021’s forecast at 2.7% of GDP is the same level of 2019’s performance. So our forecast is quite realistic.

If you look at 2021, the direct tax forecast is around the same level as 2018’s actual collection and lower than this year’s 2020 original budget. So this is consistent with Malaysia’s growth prospect.

The other concern I have is total revenue over GDP percentage is 15.1% for 2021, that is our target.

2020 is 15.8% but the average between 2015 and 2019 is about 17.1% ... so that means we are going back slowly but not yet back to those numbers before.

So there are people saying we’re too optimistic but look at it ratio-wise, it’s back to the levels of 2018/19. We won’t get back to the trajectory that we want but we are going back to the older numbers in terms of ratio, so we should be able to get to that revenue and hence that deficit forecast of 5.4%.

Going forward, if we want to get a percentage share of GDP of the 2015-2019 numbers, does this mean introducing new taxes like GST (Goods and Services Tax) … and the IRB CEO mentioned capital gains tax (CGT) …?

To be honest, that is one way to quickly achieve back to those numbers. If you look at all the developed and developing countries, we have one of the lowest revenue over GDP. There are only 2.2 million taxpayers and leakages are one thing we have to address quickly.

First of all is timing. We shouldn’t introduce a new form of taxation when the economy is recovering. The signalling is a bit mixed up.

But once the economy has recovered, that’s something we need to discuss. So, the study has to start now. The study committee was set up in 2019 even before I came in and we continued it. The expansion of the tax base is something being explored. Timing is important. All the considerations must take into account — the people, the economy, cost of living, price of goods and other factors, so that has to be done properly.

On reducing leakages, one of the methods is to really look at curbing illicit smuggling of high-duty goods. Cigarettes are one of them. The shadow economy in Malaysia averaged 21% to GDP between 2010 and 2019. That’s a big number.

In 2019, it went down to 18.2% of GDP — still a big number. So, nearly 20% of GDP is shadow economy.

So, this provides a sizeable income to the government if it’s regulated properly. So, in Budget 2021, the government has announced several measures to improve revenue collection among these from the shadow economy.

So, no more selling duty-free cigarettes on duty-free islands where sometimes it becomes a hub. We did an analysis — how come so many can smoke on this island? It doesn’t make sense. The number of cigarettes per capita, including tourists, is just too high.

We are expecting higher collection from investment income in 2021. We hope that the government companies will improve their investment income from next year.

So, is CGT something under discussion as well?

It’s one of the taxes that they looked at but it’s not the right time to introduce. CGT is more sensitive to the markets, to companies and all that. We have RPGT (real property gains tax). In other developed countries, there is CGT ... but to introduce these kinds of taxes when the economy is picking up is not right.

We can do a lot more with better collection of taxes and other forms of taxes. Tax revenue as percentage of GDP is very low. It’s 15.1% for 2021. That’s our forecast and before this, it was much higher on average, but in OECD (Organisation for Economic Co-operation and Development), it’s 30% of GDP. That is why they can do more. Imagine if I had double the revenue, during this crisis, a lot more we can do ... But, of course, politically, to tax people at a time of crisis is tough.

But as you mentioned, expanding the tax base … is GST, right?

As I mentioned, we are still exploring. Of course, we know that GST is more efficient ... Unless SST (Sales and Service Tax) can be implemented and enforced very well … and we know that is hard to monitor and enforce.

Consumption-based tax is fairer in that sense. But it was politicised at that time, during the election. The country needs to relook at our revenue measures. Post-crisis, the longer term of course, is to explain to people why we need to do this fairer form of taxation. But timing of implementation is important.

It’s just GST … or is there anything else?

You have to look at it in conjunction with economic growth. And if you look at our corporate tax, a lot of companies are complaining why it is higher than our peers’ but if you look at the percentage to revenue ... Meaning we can reduce corporate tax one day if we introduce other forms of tax.

You talk about corporate tax. Would you consider cutting the personal tax rate?

As long as we reach our target for revenue.

With the likely net outflow for 2021, how will that impact EPF? Will EPF have to rebalance the portfolio allocation to accommodate these large withdrawals?

The asset under management for EPF today is about RM960 billion. It’s a large number. We have been discussing with EPF on the measures regarding the request to take out from Account 1.

What are the EPF’s parameters? It is to make sure that they can continue with their mandate. And what is their mandate? It is to strengthen the social security net through strategic development and investment — that is the first criterion when we discuss with them.

Of course, EPF has a lot of experience. They have been in existence since 1952, so they need to balance two things. First is to assist in terms of addressing the current challenges and, second, to address the importance of having enough for retirement.

So if you look at the announcement yesterday, we anticipate ... because if we look at what people are actually asking for, even in Account 2, 4.7 million people took out money and those are basically anyone affected or not by Covid-19.

Whereas in this case, we estimate that eight million people might take out from Account 1. The criterion is those who have lost their jobs or those who had a pay cut in terms of income. This facility, in the worst-case scenario, where eight million people take out, is expected to be RM45 billion to RM50 billion of outflow.

Of course, done in stages. We’re not allowing them to take out all in one go; the first round is about RM4,000.

If you look on the flip side, if everyone takes out (as per our assumption) that RM45 billion to RM50 billion of liquidity into the country or so — there is a multiplier effect in terms of spending.

And when we check on the liquidity part, EPF has enough liquidity over the six months for all these programmes to support the members.

If there is a need for EPF to rebalance its portfolio, it will be done in an orderly manner, so that there will not be any adverse impact to its long-term strategy on markets.

The EPF’s holdings in bond markets are very significant. We think it will be manageable and it will have minimal impact on their returns and their ability to pay dividends to members.

Do you think that, in this case, the EPF will need to sell assets to raise cash to meet withdrawals?

They may have to look at rebalancing some of the portfolio definitely, over time. But, as long as the parameters don’t affect their returns ... So there are some holdings that are in the money, so they will just have to realise that. Because the EPF pays dividends based on realised profit.

Critics say the EPF is overstating the impact, by saying that dividends may be lower because of the current situation. Do you agree that lower dividends are a natural consequence of what they have been asked to do?

We have to look at the markets’ and bond market’s performance. And the market performance, if you have been buying glove companies (laughs) … the market is 1,600 already. So, let’s see their stock and bond selection — how well they have done. There is a statutory dividend rate of no lower than 2.5%.

Zooming into the numbers, economists believe that the RM80 billion inflow number is overstated, because a lot of people have lost their jobs and there’s the pay cut reduction. Do you have data to share on that?

RM70 billion to RM80 billion is correct, made up of contributions and investment income.

So, you don’t think the impact of i-Sinar will negatively impact the EPF in the long term?

For sure, no. We won’t do it if it did.

Budget 2021 was just at the start of the third wave, now we are in the thick of it. What is the outlook for Malaysia?

Well, if we look at the Conditional Movement Control Order (CMCO), it should end on Dec 6. Hopefully, things will get better, but it is still early days. If we look at MCO numbers, the estimate is RM2 billion to RM2.4 billion losses a day. During CMCO, it is about RM300 million per day because the external trade is still happening … factories are still going on and a lot of businesses are still open. But retail is still really affected and tourism is now affected again, on the domestic side.

So that’s costing the economy. But under CMCO, the economy still continues and the number of states under CMCO has been reduced. Having said that, the 4Q GDP projections that we had earlier will be affected because we are a consumption-based economy as well. That’s why the range for the GDP is between -4.5% and -5.5% in 2020.

It’s the same as Bank Negara. It announced -5.5%.

RM300 million a day is substantial, but of course, it’s not like MCO. You won’t see a negative 17.1% contraction in 4Q, but it does have an impact. Especially since the two states under CMCO contribute about 40% in terms of GDP.

Between life and livelihood, you choose life first, right. In our NSC (National Security Council) meeting, we err on the side of conservatism. We try to strike a balance and the Health DG also agreed that we should never go back to MCO because we should be more targeted.

GDP for 2020 is on the lower range of -4.5% to -5.5%?

Closer to -5.5%.

There are two things that are affecting us for the 4Q. It is the CMCO and the third wave that is affecting the whole world and we are affected by it a bit as well.

It looks like the government is maintaining its targeted moratorium strategy. With the latest expanded targeted moratorium net that was just announced, how do you expect this to impact banks/the banking system? As it is, there are concerns that banks will see their asset quality deteriorating moving forward.

There may be some asset quality deterioration but it’s not something that the banking system can’t manage.

On healthcare, critics continue to say the allocation is small and not enough. Is there a high likelihood that it will be increased again next year and where will the funds come from?

The allocation for Budget 2021 is RM31.9 billion, up by RM1.3 billion from the year before. But it excludes the amount that is coming from the Covid-19 Fund. Next year, we have put in RM1 billion and asked for another RM3 billion for the vaccine. But if there is a requirement, we will put in. This is on top of the RM600 million for special frontliners’ allowance and other funds for states to fight Covid-19 … all that is not there.

There are some Covid-19 related, but not related to MoH, but they are working with MoH … NADMA, building of centres.

They say that percentage to GDP is lower, that is a given because the budget is so much bigger. Can’t look at it that way. We can’t get to that level immediately, because when you compare to other developed countries, it is higher to GDP, but we have to do it gradually. It is the second largest after education and bigger than defence.

You have said many times that you do not have political ambitions. Yet, speculation is rife that the next step for you is entering the political arena. What is next for you?

If you ask me now, I’m not thinking about it. If you ask me today if I want to go into politics, the answer is no. I want to focus on the economy, that’s my focus today. If you ask me about tomorrow, I don’t know.

How has the journey been?

Time flies. It’s going to be nine months, close to a year. It’s crazy. There have been many challenges, I’m not involved in the political side of things. But the economic side is already … you know the challenges are real, it has been a big challenge for me. But I need to give credit to the people around me, the civil servants, and I’m also happy that a lot of my friends in the private sector have stepped up because Malaysians, at the end of the day, we all are working together to find a solution. That’s what we are doing, that’s the focus for me and my team. At the end of the day, they know that it is the time to fix things as well, for the longer term.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.