Malaysia’s budget cuts: IT sector to feel the pain

  • May involve software maintenance and hardware contract cuts, project deferments
  • All ministries told to cut up to 15% of their previously allocated budgets
Malaysia’s budget cuts: IT sector to feel the pain

THE Malaysian Government’s move to cut its growth forecast and revise its national budget for 2015 to take into account tumbling global crude oil prices is expected to have an impact on several areas in the ICT sector, according to industry observers.
 
Speaking at a special press conference on Jan 20, Prime Minister Najib Razak (pic above) announced cuts in several key areas, saying this would help cushion the blow from the fall in crude oil prices by as much as half since the middle of last year.
 
Amongst the measures he announced is the postponement of RM300 million (US$83 million) worth of purchases of non-critical assets for the civil service, especially items such as office equipment, software and vehicles, The Malay Mail Online reported.
 
Najib, who is also the Finance Minister, said Putrajaya is expected to save another RM3.2 billion (US$883 million) by reviewing fund transfers and grants to government-linked companies (GLCs), government trust funds and statutory bodies, particularly those having a steady stream of revenue and with high reserves, noted the online news daily.
 
Najib added that the Government is also expected to save RM1.6 billion (US$442 million) by “optimising spending” on overseas travel, events and the use of professional services in the day-to-day operations of the Government.
 
Malaysia’s budget cuts: IT sector to feel the painShort on details
 
Industry observers Digital News Asia (DNA) spoke to pointed out that the Prime Minister’s announcement was short on details, noting that ‘software’ and ‘professional services’ are two very broad areas that can potentially encompass many things.
 
However, a senior executive at a GLC said that while the Prime Minister may not have specifically mentioned cuts related to technology, ministries and GLCs would lower their all-round spending during lean times in any case.
 
“All ministries have been told to cut about 15% of their allocated budget,” said the senior executive on condition of anonymity, adding that some will have to undertake bigger cuts, while others won’t be affected as badly.
 
“For example, the Multimedia Development Corporation (MDeC) has been told to cut its budget by 10%.
 
“Besides this, there is a directive to cut overseas trips where possible and [luxury trips] such as offsite retreats are to be cancelled,” the executive added.
 
MDeC declined to comment when asked about how much of its budget has been cut, and how the move would affect the national ICT custodian.
 
IT spending in Malaysia
 
According to Frost & Sullivan, spending on information technology (IT) in Malaysia was to have hit about US$9 billion in 2014, comprising US$5.5 billion on hardware, US$1 billion on software and US$2.5 billion on services.
 
IT spending was expected to register a compound annual growth rate (CAGR) of 9.5% from 2013-2017, the consulting and research firm said.
 
Furthermore, IT spending across hardware, software and services was expected to grow rapidly at 10%, 8% and 9.1% respectively.

When it comes to IT spending in the country, a major driver has always been the Malaysian Government, especially with its various initiatives to encourage the adoption of ICT, including the Digital Malaysia programme that seeks to transform the nation into a fully developed ‘digital economy’ by 2020. Incidentally, MDeC is the lead agency for driving Digital Malaysia.

Frost & Sullivan’s forecasts may not be accurate any longer as global oil prices have taken a hit, falling to about half its peak value of about US$110 a barrel to about US$50 a barrel in the past six months.
 
Malaysia is a net exporter of oil and liquefied natural gas (LNG) and as such, the slide in prices has severely affected its revenue.
 
Its Budget 2015, first announced last October, was based on global oil pricing remaining at US$100 per barrel but now the Government has been forced to revise its oil price assumption to US$55 per barrel.
 
In tandem with this, Najib also revised several key metrics used to gauge the Malaysian economy.
 
Going forward, the country’s economy is expected to grow between 4.5% and 5.5%, down from the 5% to 6% projected earlier. Its 2015 fiscal deficit target was also raised to 3.2% of gross domestic product (GDP) for 2015 instead of 3% this year, from 3.5% in 2014.

Capex and opex cuts, security risks

Malaysia’s budget cuts: IT sector to feel the pain

A senior technology industry executive familiar with the Government’s ICT-buying patterns suggested two areas could be impacted – annual software maintenance licensing fee payments may not go through, while hardware and network service contracts may not be renewed.
 
“Historically, it is common for government entities and GLCs to cut back on the two aforementioned items. The first scenario means that government software may be without patches and fixes that come in 2015 with annual maintenance [contracts],” said the executive.
 
“The risk is that this may leave their software vulnerable to external security threats and may also mean that they may miss out on any fixes for standard glitches that may be discovered and patched in 2015.
 
“With the second scenario, the Government could end up using a ‘pay-per-incident’ mode instead of having proactive Preventive Maintenance (PM). This means that failures are more likely to occur without warning in hardware and networks as no PM is done.
 
“Furthermore, if there is any equipment failure, response times to restore systems would be compromised and take longer,” the executive pointed out.
 
When asked if it was likely that this how the Malaysian Government and GLCs would cut technology spending, the executive said he could not be certain, but added that “as damning as it sounds, capital expenditure cuts usually come first.”

“The first cuts are usually all the ‘nice-to-haves.’ After that come operational expenditure cuts, which include monthly, quarterly or annual payments for hardware service and software licensing maintenance,” he said.
 
[Read also: Disrupt: Batten down the hatches, gonna be a bad year]
 
GST to go on, project deferments
 
A senior executive from the consulting sector whom DNA spoke to said it’s difficult to say what else might happen, but noted that the Government is unlikely to hold back on the Goods and Services Tax (GST) despite the revision in the Budget.
 
“It’s hard to say what else might happen, but the GST is certain to go on,” he said.
 
The chief information officer (CIO) of a large Malaysian conglomerate noted that the Prime Minister’s references to cuts in the Budget could also mean cuts beyond the “traditional understanding” of doing away with spending, and could instead mean the deferment of select ‘mega projects.’
 
“Cuts don’t have to mean cancelling projects but could mean pushing back some of the projects that were already in the pipeline, towards later years such as 2017 or beyond,” said this CIO.
 
“Certain projects too may be contracted to local companies instead of foreign ones as this keeps the capital within the country’s borders,” he added.
 
Related Stories:
 
Budget 2015: What's good, what's not-so-good
 
Disrupt: Batten down the hatches, gonna be a bad year
 
Malaysia’s ICT outlook: Cloud disappointment, 4G lag
 
Malaysia’s IT spending to grow 10% in 2014, outpacing APAC: Gartner
 
 
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