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On Thursday, I had the privilege of hosting a discussion featuring Hann Liew, the founder and ex-CEO of RinggitPlus, and Economist Sani Hamid.

Our conversation centered upon Budget 2024 and its potential impacts (both positive and negative) to the rakyat.

We also discussed the ringgit’s road to RM5.00 and assets to consider with geopolitical tensions on the rise.

For those who missed the insightful session, the full replay is now available on Spotify and YouTube.

Scroll down for a written summary of the session.

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Quick Facts About Budget 2024

It is (yet again) the biggest allocation, coming in at a whopping RM393.8 billion compared to this year’s budget of RM388.1 billion.

Themed at “reforming the economy, [and] empowering the rakyat,” Anwar’s budget aims to increase the government’s revenue and move away from subsidies to a system that benefits lower-income households.

• Diesel subsidies will be cut in a phased manner.

• To continue reduced electricity subsidies for the top 10% of consumers.

• Temporary price controls on chicken and eggs will be lifted.

• Service tax rate (SST) to increase to 8% from 6% (except food and beverages, and telecommunications).

Quick Facts About the Ringgit

The Malaysian ringgit is now at its lowest level since the Asian Financial Crisis in 1998.

On Friday, the local note dropped 0.47% to RM4.7710 as it struggles with dollar strength, backed by the conflict in the Middle East.

Other factors include the interest rate differential between the US and China’s economic slump.

Bank Negara Malaysia’s decision to hold the OPR at 3.0% is also dragging the ringgit lower, as global central banks are looking to keep rates higher for longer.

Q1: What are your opening impressions of Budget 2024? Yay or Nay?

Both speakers agreed that next year’s Budget is satisfactory, but it could have been better.

Hann talked about “ripping off the band aid” – if diesel subsidies are to be removed, why not do it together with petrol subsidies and increase cash vouchers (Sumbangan Tunai Rahmah) for citizens?

The government has paid almost RM80 billion in 2022 to keep prices low with subsidies. This money could have been used for other areas to improve Malaysia’s fiscal position.

Sani noted that while the proposal looks good, the crucial point lies on how the policies will be actionable. Often, details that are tabled in the budget don’t go well as planned.

Q2: How did markets react to Budget 2024? What are its impacts on the KLCI and the ringgit?

Following the announcement of the Madani Budget, the FBMKLCI surged by almost 2%.

This reflects investor confidence in the outlined details, and the very fact that the market stayed green after the proposal proves that Budget 2024 has left a somewhat favorable impression on investors.

As for the ringgit, the Budget's influence on the local currency is limited, as it has been dragged lower by external factors beyond Malaysia’s control.

Q3: Will the removal of ceiling prices for eggs and chicken correspond to higher prices?

The removal of ceiling prices may cause some pain in the short-term, but it is good in the long run.

Artificial ceilings were the main cause of shortages and lower quality products. Last year, Malaysia ran into a severe shortage of chicken due to high feed and diesel costs spurred by the Ukraine war.

Farmers were unable to make a profit with the enforced price ceiling, and many of them left the industry or exported their chickens to other countries, resulting in a supply shock.

Hann: “What’s worse than high prices of chicken? No chicken.”

Now, with the ceiling prices removed, farmers will be able to readjust prices accordingly to benefit their businesses and consumers.

It may cause a temporary spike in prices, but that would encourage more players/farmers to come in, thus increasing the supply and rebalancing the price.

Q4: The SST has been raised from 6% to 8%. Will this eventually lead to price hikes for consumers?

The purpose of this increase is to boost the government’s revenue and yes, it will eventually lead to price hikes, even though the F&B and telecommunications industry are excluded.

Logistics and supply chain companies will use this excuse to pass down the cost to consumers.

Hann stated that the SST increase is probably a hint at the government’s plan to re-implement GST next year at a much lower rate (3-4%).

This is because GST is much more transparent and easier to calculate compared to SST.

Q5: The government is phasing out diesel subsidies. Is this a good move?

This is a good move.

The profiteering off diesel is a major issue. Companies are buying Malaysian diesel at a subsidized price and selling it to other countries illegally below the market price to pocket more profits.

Since the subsidies come from the rakyat, you’re effectively paying your hard-earned tax money to these companies and increasing their profits.

Furthermore, blanket diesel subsidies mainly benefited the T20s as they consumed more fuel compared to the lower and middle class.

The removal may lead to overall price increases, as the logistics chain heavily uses diesel, but the government can counteract this by raising the “Sumbangan Tunai Rahmah” for citizens.

Q6: With the removal of subsidies and price ceilings, will inflation rise? If so, will BNM be forced keep rates higher for longer?

Inflation is likely to trend upwards next year due to the Budget.

Anwar mentioned that with the removal of subsidies, the overall CPI is forecasted to average 2.1-3.6% in 2024.

But whether or not it will force BNM to hike rates depends on how consistently elevated price pressures are.

If it’s a temporary spike and cools after subsequent months, then there’s nothing urgent for BNM to worry about.

What the speakers are concerned with is the increased geopolitical tensions (ie. Middle East Conflict, Ukraine War, US-China tensions). Should they flare up, global inflation could spike again.

Q7: What’s happening to the ringgit? Is the conflict in the Middle East the only reason for its weakness?

The ringgit’s weakness is mostly due to geopolitical uncertainty, primarily the conflict in the Middle East.

Bank Negara can only lessen the local note’s day-to-day volatility. Contrary to popular belief, it cannot change the direction of the ringgit.

As of September 2023, the central bank only has $110.1 billion in foreign currency reserves.

Should BNM adhere to the rakyat’s wishes to “turn on the jets” for the ringgit, the central bank would have to burn through a large amount of their FOREX reserves, and it wouldn’t be a sustainable solution to the problem.

What we’re seeing is dollar strength and a flight to safe havens. The ringgit is expected to be weak for the rest of the year, but it is likely to strengthen next year as central banks gradually ease interest rates.

With geopolitical tensions on the rise, the speakers laid out a few themes for investors to consider: commodities, gold, and Bitcoin.

The full replay of the discussion is available on Spotify.

That’s all for this week’s newsletter!

DISCLAIMER: The information contained in this newsletter is for informational and educational purposes only. Nothing herein shall be construed to be financial, legal, or tax advice.

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