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Malaysia 2018 Federal Budget - Economic Viewpoint Report

Mohd Noordin
By Mohd Noordin
5 years ago
Malaysia 2018 Federal Budget - Economic Viewpoint Report

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  1. Economic Viewpoint 30 October 2017 Malaysia 2018 Federal Budget Casting far and wide – improved economy prompt more optimistic budget and generous spending allocation Economics Kenanga Investment Bank Berhad T: 603-2172 0880 OVERVIEW ● Growth target upgraded for 2017; to remain elevated in 2018. The 2018 Budget saw a significant upward revision on GDP growth and a narrower range of 5.2-5.7% (previously 4.0-5.0%). Thereafter, MoF expects growth to possibly ease a little to 5.0-5.5% in 2018. ● External factors conducive to growth. Despite lingering risk in the global economy, continued growth consolidation of the global economy, especially among the advanced economies, prompted increase in external demand and global investment flows. This is further supported by growth amongst major emerging economies. ● Fiscal consolidation theme persists. On continued fiscal consolidation agenda, the government is confident to reduce the fiscal deficit to 3.0% of GDP in 2017 and to 2.8% of GDP next year facilitated by both prudent budgetary management and higher economic growth. ● Revenue enhancement to provide more fiscal space. Better-than-expected economic prospects observed in 2017 are expected to help improve revenue collection, particularly on personal and corporate income tax. This was further supplemented by stricter collection and enforcement efforts. ● Oil prices strengthens; revenue upside. On oil prices, MoF expects oil price to average USD50/barrel in 2017 before advancing to USD52/barrel in 2018, likely supported by OPEC’s measures to support oil prices. ● Managing OPEX growth. The OPEX is projected to expand 4.6% and 6.5% for 2017 and 2018 respectively (2016: -3.1%). The increase largely stems from higher payment of emoluments and retirement charges, along with supplies and services. This was met by cuts largely from subsidies and social assistance; ● DEVEX growth remains below 11MP ceiling. Net DEVEX expanded 11.5% in 2017 (2016: 3.5%) though this was likely due to the shortfall in realised DEVEX in 2016. It is expected to be relatively flat in 2018 at around RM45.4b, around 18.0% of the 11MP ceiling. ● Applying restraint. To achieve a lower deficit target, the government is targeting total budget spending (OPEX+DEVEX) to remain below 20% of GDP in the coming years. At the same time, this requires total revenue to grow by more than 6.0% annually. This is not an easy feat given the uncertainty in the global economy and fluctuating commodity prices. ● Higher net borrowing to see a GII focus. The deficit will be financed by a 5.5% increase in net borrowing or 25.4% increase in gross borrowing (2016: -7.1% and -2.4% respectively). This, in turn, will largely comprise Malaysian GII; net borrowing in GII is expected to rise 63.4%. ● Casting far and wide: The budgeted allocations are targeted at a wide spectrum of areas, which will improve the wellbeing of the rakyat, and address the perennial issue of rising costs of living amidst a slower growth environment. ● Election-themed. Tax reduction for the middle income group, BR1M, special payments to civil servants and head of small communities, large allocation to the agricultural sector, targeted spending in the East Coast (Kelantan) and East Malaysia states, all seemed to suggest attempts to secure popular support for the coming 14 th General Election (GE14) expected to be held early next year. PP7004/02/2013(031762) Page 1 of 14
  2. Economic Viewpoint 30 October 2017 Overview Another rakyat-focused budget . Budget 2018 again centres on building a more inclusive economy for the rakyat and raising Malaysia’s competitiveness in selected sectors. The proposals announced by the Prime Minister Datuk Seri Najib Abdul Razak, who is also the Finance Minister, continue to address the needs of the majority, particularly the B40 and M40 groups. As the third budget under the 11th Malaysia Plan, it also aims to gradually reduce the nation's fiscal deficit, amidst a challenging economic environment and in anticipation of an upcoming General Election. Boosting economic resilience. Apart from wining people’s hearts, the budget’s mainly focuses on regaining investor and consumer confidence while striking a balance between the need to consolidate and, if need be, to raise public spending to ensure the economy becomes more resilient to face growing instability in the global economy. The budget also lays the foundation for the aspirations of National Transformation 2050 or TN50. Casting far and wide. The budgeted allocations are targeted at a wide spectrum of areas, which will improve the wellbeing of the rakyat, and address the perennial issue of rising costs of living amidst a slower growth environment. Having said that the budget contains various popular measures — infrastructure spending, more funding for social welfare, continued cash handouts to the lower income group, special payments to civil servants and pensioners, as well as measures to help deal with housing affordability are high on the list. 2017 Growth Outlook A more buoyant 2017 outlook. As expected in our 2018 Budget Review, the 2018 Budget significantly upgrades its assessment for the economy in 2017. The Ministry of Finance (MoF) now projects a narrower 5.2-5.7% growth with an implied average growth projection of 5.4%, a substantial upgrade from its prior projection for a 4.0-5.0% growth range (made during the 2017 Budget) and Bank Negara Malaysia’s (BNM) 4.3-4.8% growth range. The MoF revision is tilted on bullishness relative to Bloomberg’s median consensus estimate of 5.1% (ranging from 4.3-5.6%) though it is well within the house forecast of 5.4%. …sparked by stronger 1H17 economic conditions. The Fig. 1: Supply-Side GDP Growth and MoF Forecast upgraded growth outlook in the 2018 Budget is largely consistent with strong outperformance of various growth indicators (such as the industrial production and external trade data). Furthermore, Malaysia’s 1Q17 and 2Q17 GDP growth of 5.6% and 5.8% respectively easily surpassed their respective consensus estimates of 4.8% and 5.4% respectively, making the previous forecast range of 4.0-5.0% unsustainable. Our house view is that 3Q17 and 4Q17 GDP growth is expected to remain elevated albeit tapering at 5.3% and 4.8% respectively (2016: 4.2%). Source: Ministry of Finance, Kenanga Research PP7004/02/2013(031762) Page 2 of 14
  3. Economic Viewpoint 30 October 2017 Table 1 : MoF Macroeconomic Forecast Summary 2016 2017F 2018F Remarks GDP (%YoY) 4.2 5.4 (5.2-5.7) 5.2 (5.0-5.5) Growth has been significantly upgraded from its prior 4.0-5.0% forecast given strong 5.7% growth observed in 1H17. MoF expects continued resilience, if slightly tapering growth moving into 2018. MoF’s forecast trends are largely consistent with the house forecast though we believe that MoF’s growth projections for 2018 may be a tad optimistic, particularly on sustained manufacturing and service sector strength. We expect GDP to grow 5.4% in 2017 and 4.9% in 2018. Unemployment (%) 3.4 3.4 3.3 The MoF’s more optimistic growth forecast is grounded in its view on improving labour market. This, along with increase in average income, is expected to sustain growth in private consumption. Total Trade (MYR bn.) 1,486 1,740 1,800 The MoF’s noted a surge in total trade, driven by improved global demand and robust domestic services, with double-digit growth observed for exports and imports (Jan-Aug17). For 2018, gross exports (sustained by E&E) and imports (from investment activities) are expected to be a single-digit growth on higher 2017 base. Trade Balance (MYR bn.) 88.1 94.6 97.0 On sustained uptrend of exports in the E&E sector and commodities amidst moderating imports growth, MoF expects the trade balance to widen somewhat moving into 2018. 2.3 Current account is projected to narrow marginally in 2017 on strong exports and narrower services account deficit from higher travel receipts. The MoF notes the hosting of SEA Games, ASEAN Para Games and Formula 1 Grand Prix as a catalyst for higher travel receipts. While current account balance is expected to widen marginally in 2018, given a relatively bullish GDP projection for GDP, current account surplus as a percentage of GDP will likely narrow slightly. Current Account Surplus (% of GDP) CPI (%YoY) Brent Average Price (USD/bbl) 2.4 2.4 2.1 3.5 (3.0-4.0) N/A (2.5-3.5) Higher 2017 inflation is largely consistent with higher retail fuel prices – stemming from the pass-through effect from firmer global crude oil prices. In the context of higher base effect of 2017, while crude oil prices are expected to remain high even as demand-pull pressures crops up, inflation is likely to moderate to a range of 2.5-3.5% in 2018. 45.10 50.00 52.00 On Malaysia’s continued commitment in the OPEC pact, at least for 1Q18, Brent oil is expected to trade at a higher USD52/barrel moving into 2018. Source: Ministry of Finance, Kenanga Research Agriculture, manufacturing and services revised upwards. The MoF’s GDP growth upgrade was largely driven by its more optimistic outlook of the manufacturing sector which was revised to 5.5% (previously 4.1%). In line with the general consensus, growth forecast of the agriculture sector was significantly revised upwards to 5.6% (previously 1.5%), similar to our upward revision in 1Q17 following the impact of the current intermission of El Niño since the beginning of 2H16. Services growth is now projected to grow 5.9% (previously 5.7%). ...while mining and construction revised down. However, not all sectors were upgraded. Growth in mining and quarrying was slashed to just 0.5% (previously 1.3%), largely from Malaysia’s subsequent participation in the OPEC voluntary production cut. The construction sector was likewise revised lower to 7.6% (previously 8.3%). Overall, the MoF numbers are roughly in line with our estimated distribution of growth by sectors. PP7004/02/2013(031762) Page 3 of 14
  4. Economic Viewpoint 30 October 2017 In domestic demand we thrust . The MoF maintained its optimism in domestic demand’s resilience as a growth Fig. 2: Demand-Side GDP Growth and MoF Forecast driver, particularly private expenditure. The MoF estimates private expenditure to expand 7.4% in 2017 (2016: 5.6%) on resilient consumption (largely from improved income, reduction in Employees Provident Fund contribution (EPF) and stable employment) and investment (stemming from improved business optimism, capital outlays in services and manufacturing sector, and net FDI inflow). These numbers points to MoF’s optimism that growth observed in 1H17 will be sustained, if tapering a touch. The MoF expects private consumption to grow 6.9% (2016: 6.0%) while private investment is expected to gain 9.3% (2016: 4.3%), backed by buoyant consumer and business confidence. Public Source: Ministry of Finance, Kenanga Research Note: * of Goods and Services expenditure, meanwhile, is projected to grow 3.1%, comprising a 2.7% expansion in public consumption (largely from higher emoluments and other charged expenditure) and 3.7% expansion in public investments (stemming from DEVEX especially on transportation infrastructure and public facilities improvement). Table 2: GDP Growth Forecast by Sector and Demand Aggregate (2017 & 2018) Kenanga By Sector Agriculture Mining Manufacturing Construction Services Real GDP Midpoint Forecast By Aggregate Demand Consumption Public Private Investment Public Private Public Spending Private Spending Aggregate Demand Exports Imports Real GDP MoF 2015 2016 1Q17 2Q17 3Q17E 4Q17F 1H17 2H17F 2017F 2018F 2017F 2018F 1.4 5.1 4.7 8.2 5.2 5.0 -5.1 2.2 4.4 7.5 5.6 4.2 8.3 1.6 5.6 6.5 5.8 5.6 5.9 1.9 5.9 6.5 6.3 5.8 5.1 0.7 5.3 6.9 5.7 5.3 4.6 0.5 4.5 6.1 5.4 4.8 7.1 0.9 5.8 7.4 6.1 5.7 4.9 0.6 4.9 6.5 5.6 5.0 5.9 0.8 5.3 7.0 5.8 5.4 2.0 1.0 4.6 7.7 5.6 4.9 5.6 0.5 5.5 7.6 5.9 5.2-5.7 5.4 2.4 0.9 5.3 7.5 5.8 5.0-5.5 5.2 5.7 4.4 6.0 3.6 -1.1 6.3 2.1 6.1 5.1 0.3 0.8 5.0 4.9 0.9 6.0 2.7 -0.5 4.3 0.4 5.6 4.3 1.1 1.1 4.2 6.8 7.5 6.6 10.0 3.2 12.9 5.8 8.2 7.7 9.8 12.9 5.6 6.4 3.3 7.1 4.1 -5.0 7.4 0.2 7.2 5.7 9.6 10.7 5.8 6.0 3.5 6.5 4.0 1.1 5.3 2.6 6.2 5.4 6.8 8.1 5.3 5.6 5.3 5.7 2.5 0.6 4.1 3.3 5.4 4.8 5.1 6.4 4.8 6.6 5.3 6.9 6.9 -0.9 10.0 2.9 7.7 6.7 9.7 11.8 5.7 5.8 4.5 6.1 3.2 0.8 4.8 3.0 5.8 5.1 5.9 7.2 5.0 6.2 4.9 6.5 5.1 0.1 7.6 3.0 6.8 5.9 7.7 9.4 5.4 6.0 4.1 6.4 4.3 1.8 5.5 3.2 6.2 5.5 2.9 3.1 4.9 6.0 2.7 6.9 7.4 3.7 9.3 3.1 7.4 6.4 8.0 9.9 5.2-5.7 5.7 1.3 6.8 5.0 -3.1 8.9 -0.4 7.3 5.5 2.3 2.5 5.0-5.5 Source: Ministry of Finance, BNM, Kenanga Research, E: denotes estimate, F: denotes forecast Buoyant trade prospects. Coinciding with strong sequential monthly trade data, the MoF revised up its export and import growth target to 16.6% and 17.8% respectively (previously 1.1% and 1.3% respectively). Exports were largely driven by robust growth in the electrical and electronic (E&E) subsector though MoF notes that the non-E&E sectors are likewise showing strong growth, particularly for refined petroleum products and chemical and non-chemical products, among others. Notwithstanding higher growth in imports relative to exports, the trade balance is estimated to widen to RM94.6b (previously estimated at RM88.3b; 2016: RM88.1b). This is in line with the MoF’s assertion of greater support from external demand. Confluence of positive external factors. While MoF notes that global outlook remains tilted to the downside on insular policies, post-Brexit uncertainties, geopolitical tensions and the pace of global monetary policy normalisation, MoF also notes that the global economy has continued to consolidate with global growth supported by vibrant growth among the PP7004/02/2013(031762) Page 4 of 14
  5. Economic Viewpoint 30 October 2017 advanced market economies (AMEs). Emerging market economies (EMEs), including ASEAN and by extension Malaysia, are hence poised to benefit from high global demand and investment. 2018 Growth Outlook Elevated, but tapering growth. Picking up from higher Fig. 3: Federal Government Finances cyclical growth observed in 2017, the MoF likewise expects growth to remain buoyant in 2018 with a forecast of 5.0-5.5% (or an implied average growth of 5.2%). Despite its lower growth forecast relative to 2017, the MoF 2018 growth range places itself outside the house projection of 4.9% and the average consensus estimates of 4.8% (ranging from 4.5-5.3%). This comes as the MoF sees significantly higher growth in the manufacturing sector, relative to the house estimates, along with a more optimistic outlook in the agriculture and services sector. Faith in sustained domestic demand growth. On the demand side, MoF’s forecast is grounded in its continued Source: Ministry of Finance, Kenanga Research optimism on domestic demand growth. MoF projects private sector expenditure to remain the key growth driver, even as public sector expenditure takes a step back, reflective of the government’s intent to consolidate the fiscal position. Private sector expenditure is projected to expand at a slightly slower 7.3% in 2018 (2017F: 7.4%), with a 6.8% and 8.9% expansion in private consumption and investment respectively. On the public sector, the overall expenditure is projected to shrink slightly by 0.4% (2016: +3.1%) with the pullback in public investment (2018F: -3.1%; 2017F: +3.7%) – from lower capital outlays by public corporations – to further weigh against slowing public consumption (2018F: 1.3%; 2017F: 2.7%). However, we note that Budget 2018 includes modest increases in expenditure, notably from subsidies and social assistance, potentially reducing the downside to public consumption. Positive on manufacturing sector’s resilience. On the supply side, while 2018 growth is expected to taper overall in almost all sectors (with the exception of the mining sector, likely from recovering oil prices and the lower base in 2017), MoF’s projections maintains an elevated growth outlook, particularly for the manufacturing sector and services sector which MoF expects to grow by 5.3% and 5.8% respectively, just slightly lower than their projected 2017 growth of 5.5% and 5.9% respectively. Global growth continues to shine. Sanguine economic prospects domestically will also be enhanced by brightening global economic outlook with AMEs growth likely to stabilise while growth in EMEs improve on the back of rising market confidence, sustained external demand and a stronger domestic demand contribution. 2017 Fiscal Management A more solid fiscal footing. Stronger economic growth meant that projected 2017 government finances are at a better footing than previously anticipated with revenue, operating expenditure (OPEX) and development expenditure (DEVEX) forecast to increase for 2017. The MoF projects that government revenue growth to rebound by 6.1% for 2017 (2016: -3.0%), similar with OPEX (+4.6% from -3.1% in 2016) and net DEVEX to expand by 11.5% (2016: +3.5%). However, notwithstanding higher fiscal space and larger GDP base, the MoF maintained its fiscal deficit target of 3.0% of GDP (i.e. -2.97% compared to the previously estimated -3.05%). PP7004/02/2013(031762) Page 5 of 14
  6. Economic Viewpoint 30 October 2017 Table 3 : MoF Revenue Forecast 2016 2017E 2018F Remarks Direct Tax (RM bn.; %YoY) 109.6 (-1.9) 119.7 (9.2) 127.7 (6.7) MoF attributes higher direct tax collection (particularly for individual and companies income tax) to higher tax collection and enforcement (with the establishment of the Collection Intelligence Arrangement), and improved economic activity. Furthermore, the recovery of oil price has also helped reverse the decline in petroleum income tax, resulting in a sharp 29.9% growth rebound (2016: -27.1%). Indirect Tax (RM bn.; %YoY) 59.7 (11.3) 60.5 (1.3) 63.8 (5.6) In addition to slightly higher GST collection, indirect taxes were boosted by higher exports and import duties, in line with more buoyant trade flows. 41.2 (52.5) 41.5 (0.7) 43.8 (5.5) 2017 saw slightly higher GST collection from a slightly more active wholesale and retail sales activity. Higher amount of GST registrants have also helped widen the net on GST administration. 48.3 (7.0) Stable investment income – related to better economic and investment climate – provides an additional layer of support to government revenue. MoF singles out investment incomes by PETRONAS and BNM, along with its divestment in Sarawak Hidro Sdn Bhd. 239.9 (6.4) We are positive on the government’s ability to enhance revenue collection as part of its two-pronged initiative of reducing fiscal deficit (the other being expenditure rationalisation). We believe that these targets remain achievable overall, on improved economic prospects. GST (RM bn.; %YoY) Non Tax Revenue (RM bn.; %YoY) Total Revenue (RM bn.; %YoY) 43.1 (-19.7) 212.4 (-3.0) 45.1 (4.8) 225.3 (6.1) Source: Ministry of Finance, Kenanga Research Mildly expansionary 2017 Budget a growth catalyst. The MoF claims that 2017 Budget’s tax measures on small and medium enterprises and other business activities are paying dividends, leading to a more conducive business environment, hence improving taxpayers’ cash flow and accelerated investment activity, subsequently increasing government revenue in the long-run. Higher direct tax revenue reflective of a better economy. Higher revenue collection is mainly expected to come from the direct tax component which is expected to increase by 9.2%, largely from a higher income tax collection of 9.4% (2016: -1.6%). This likely reflects improved corporate profitability and improving wage growth as evidenced by the 6.6% and 9.2% projected growth in company and individual taxes respectively. Corporate and personal income tax growth was also complemented by stricter compliance and enforcement by the Inland Revenue Board. At the same time, recovering oil prices also helped provide a boost to petroleum income tax which is forecast to rebound to 29.9% (2016: -27.1). For now, the government expects oil prices to average USD50/barrel for 2017, from an earlier assumption of USD45/barrel, before rising modestly to USD52/barrel in 2018 (2016: USD45.10/barrel). Other revenue sources likewise positive. Indirect taxes rose by a more modest 1.3% (2016: 5.7%) mainly from higher export duties as growth in Goods and Services Tax (GST) collection was flattish at 0.7% to RM41.5b in 2017 (2016: 3.9% at RM41.2b). The revised revenue projection exceeded the MoF’s original estimates by 2.6%, largely from the higher than initially expected non-tax revenue, particularly from investment income from PETRONAS and Bank Negara Malaysia (reflecting a better investment climate), along with divestment of equities in Sarawak Hidro Sdn. Bhd. PP7004/02/2013(031762) Page 6 of 14
  7. Economic Viewpoint 30 October 2017 Table 4 : MoF Expenditure Forecast 2016 2017E 2018F Remarks OPEX (RM bn.; %YoY) 210.2 (-3.1) 219.9 (4.6) 234.3 (6.5) Despite rationalisation exercise, the OPEX is expected to pick up moving into 2018. While emoluments and retirement charges is expected to see slower growth as the government attempts to rationalise the civil service, this was somewhat mitigated by subsidies and social assistance which is set to rise for the first time since 2012. Current Balance (RM bn.; %YoY) 2.2 (7.5) 5.4 (141.4) 5.6 (3.4) Higher current balance is generally as expected given the outperformance of revenue amid a more measured increase in OPEX. Moving forward, however, higher OPEX will likely mitigate some of the higher revenue expected in 2018. DEVEX (Net) (RM bn.; %YoY) 40.6 (3.5) 45.3 (11.5) 45.4 (0.2) The relatively low increase in DEVEX (i.e. just at around 18% of the 11MP’s ceiling). For 2017, the DEVEX will largely be concentrated in transportation (being the construction and upgrade of transportation network), education and training (earmarked for human capital development), trade and industry (for export and tourism promotion and development measures), and of interest, housing (notably for financing PR1MA and other allocation for PPA1M and PPR). Overall Balance (RM bn.; %YoY) -38.4 (3.2) -39.9 (3.9) -39.8 (-0.2) With development expenditure little changed, the overall balance trajectory tracks that of the current balance. 2.8 Given a more bullish view on the economy for 2018 amid flat overall balance, the MoF projects continued decline in the fiscal deficit, falling further to 2.8% in 2018. This differs from the house forecast of 2.9% of GDP given our less sanguine outlook on the economy. Fiscal Deficit (% of GDP) 3.1 3.0 Source: Ministry of Finance, Kenanga Research OPEX increase driven by higher emoluments. The moderate 4.6% increase in OPEX highlights the government’s challenges of managing higher spending requirement while maintaining its expenditure rationalisation theme. The bulk of the increase originates from the emoluments, retirement charges, debt service charges, and grants and transfers to state governments which are projected to increase 7.8%, 12.5% and 16.1% respectively (2016: 4.4%, 11.4% and 0.3% respectively). Higher payments of emoluments and retirement charges mainly came from the implementation of minimum wage and pension payments starting July 2016. Furthermore, emoluments were further increased through two salary increments pencilled in. However, MoF noted that the emolument bill will likely be contained moving forward as the size of civil service is kept at 1.6 million while the government continues to rationalise the public sector. Other drivers of OPEX growth include the supplies and services component (from higher maintenance charges for several recently completed development projects), debt service charges, and asset acquisition though these increases were comparatively smaller in magnitude. PP7004/02/2013(031762) Page 7 of 14
  8. Economic Viewpoint 30 October 2017 Table 5 : Federal Government Finance Trend and Forecast Ministry of Finance (RM billion) 2011 2012 2013 2014 2015 2016 2017 2018 Kenanga Research 2017 2018 Revenue 185.4 207.9 213.4 220.6 219.1 212.4 225.3 239.9 222.5 225.3 Total Expenditure 229.0 252.5 253.5 259.1 257.8 252.2 265.9 280.3 263.5 268.9 182.6 205.5 211.3 219.6 217.0 210.2 219.9 234.3 216.5 220.0 46.4 46.9 42.2 39.5 40.8 42.0 46.0 46.0 47.0 48.9 Loan Recoveries -1.1 -2.6 -1.5 -1.1 -1.5 -1.3 -0.6 -0.6 -0.9 -1.4 Overall Balance -42.5 -42.0 -38.6 -37.4 -37.2 -38.4 -39.9 -39.8 -40.1 -42.2 Operating Expenditure Gross development Expenditure % of GDP Federal Government Debt (% of GDP) Real GDP Grow th Average Crude Oil Price (US$/Barrel) -4.7 -4.3 -3.8 -3.4 -3.2 -3.1 -3.0 -2.8 -3.0 -2.9 54.3 53.3 54.7 52.7 54.5 52.7 50.9 N/A N/A N/A 5.3 5.5 4.7 6.0 5.0 4.2 5.2 - 5.7 5.0 - 5.5 5.4 4.9 110.9 111.7 108.7 99.5 53.6 45.1 50.0 52.0 51.0 50-55 Source: Ministry of Finance, BNM, Kenanga Research, Crude Price for 2017 and 2018 are based on forecast …as the subsidies and social assistance falls. Picking up from the previous year, the government continues to trim subsidies and social assistance, and grants to statutory bodies, in its efforts to consolidate its fiscal position. Subsidies and social assistance is projected to fall by 6.5% to RM23.0b (2016: -9.5%), largely from the rationalisation of cooking oil subsidy, and the implementation of weekly-managed fuel prices. However, the MoF noted that it has opted for a more surgical approach towards subsidies and welfare disbursement, particularly in its flagship “Bantuan Rakyat 1Malaysia” (BR1M) programmes which targets among the poorest segment of the population. Grants to statutory bodies have also decreased by a relatively small 0.8% (2016: -12.5%), with emphasis on entities with high accumulated reserves. The revised 2017 OPEX exceeded the MoF’s original forecast by 2.4%, largely from the less ambitious decrease in grants to statutory bodies – the 2017 Budget originally planned for a 30.7% slash in grants to statutory bodies. DEVEX spikes on lower base. 2017’s gross DEVEX is expected to total RM46.0b in 2017, rising by 9.4% (2016: 3.0%). While this easily surpassed the 2017 Budget’s original target for a 2.2% growth, the realised 2016 gross DEVEX of RM42b fell short of the MoF’s prior forecast of RM45.0b. Notwithstanding the lower base effect, much of the development expenditure remains focused on infrastructure and investment-related projects. As with the previous year, the transportation sector is expected to continue as the largest recipient of these development spending at 23.4% of total DEVEX, mainly for the maintenance of air and sea ports, construction and upgrading of transportation networks, particularly in the rural areas. Among these transportation network projects, key highlights include the Pan Borneo Highway, Sungai Besi-Ulu Klang Elevated Expressway and West Coast Expressway. Other notable DEVEX spending include the education and training allocation which takes up 12.8% of DEVEX, mainly for schools, higher learning institutions and other technical and vocational education training (TVET) programmes. A pivot towards Islamic debt. The government will resume increasing its net borrowings by 5.5% (2016: -2.4%) to fund the 2017 deficit with a net borrowing of RM40.8b, comprising gross borrowing of RM108.0b less principal repayment of RM67.2b. The bulk of these borrowings will be done domestically via the net issuance of RM33.5b Malaysian Government Investment Issues (GIIs), coinciding with the lower RM7.3b net borrowing in Malaysian Government Securities (MGS). Net borrowing in MGS is projected to contract by 58.2% amid higher net borrowing from GII, in part to cater for growing demand of Islamic papers and with the development of the sukuk market. Stable debt levels. Overall, government debt is likely to increase to RM685b (2016: RM648.5b). However, this will represent 50.9% of GDP from 52.7% in 2016. It will mainly be in the form of domestic debt (49.2% of GDP) and will mainly consist of MGS (27.0% of GDP) and GII (19.4% of GDP). Notwithstanding lower net MGS borrowing In terms of debt profile, the MoF points to the increased weightage on longer maturity bonds as a means of reducing refinancing risk (60.5% of total outstanding debt have maturity profile in excess of ten years with only 10.6% of MGS and GII maturing in 2017). PP7004/02/2013(031762) Page 8 of 14
  9. Economic Viewpoint 30 October 2017 Fiscal Outlook 2018 Committed to fiscal consolidation . MoF remains keen to push for its consolidation agenda moving into 2018, in its bid to achieve a near-balanced budget in 2020. In 2018, the fiscal deficit is expected to narrow further to 2.8% of GDP. This will be underpinned by improved economic conditions, particularly in the private sector and the possibility of further rationalising expenditure. Stronger economic activity and tax collection to boost Fig. 4: Federal Government Oil & Gas Revenue revenue. In line with improved economic prospects, MoF expects improved income tax collection (for both personal and corporate taxation). This will be further supported by stricter enforcement of tax compliance and administration in RM bil Other O&G Revenue 100 Petronas Dividend 50% O&G share of total revenue (RHS) 80 40% 60 30% an effort to reduce tax evasion and leakages. Separately, the upside on oil prices projected by the MoF (2018F: USD52/barrel; 2017F: USD50/barrel) may point to some, albeit less prominent increase in petroleum related revenue. 2018F 40 20% Combined, the MoF puts 2018 revenue growth at 6.4% (2017F: 6.1%). On indirect tax, the projected faster growth of 20 10% the GST to 5.5% to RM43.8b (2017F: 0.7%) will provide a further upside to revenue growth. Attempts to cap OPEX growth. The 2018 Budget seeks to 0 0% 2001 2005 2009 2013 2017F Source: Ministry of Finance, Kenanga Research moderate OPEX growth with a more cautious increase in emoluments (likely from caps to civil service size, managing duplication of civil service functions, among others) and grants and transfers to state governments and statutory bodies. However, the scope for reducing OPEX appears to be limited by rising subsidies and social assistance which the MoF expects to increase 15.0% in 2018, its first time since 2012. This coincides with the relatively generous budget announced – largely consistent with an election budget. Flattish DEVEX growth. With the DEVEX allocation at RM46.0b (17.7% of the 11MP ceiling), net DEVEX will see flattish to no growth for 2018 (2018F: 0.2%). This likely points to the government’s efforts to keep a lid on DEVEX, as OPEX growth remained elevated overall. As with the previous year, the economic sector will remain the largest destination of these funds, with emphasis on the development and upgrading of public infrastructure and transportation network. The education and training segment, meanwhile, will be earmarked the highest allocation under the social sector of the DEVEX though we also note that the housing subsector will see higher allocation, largely for the construction of low cost houses and quarters for civil servants. Strong overtures on winning hearts (and votes). The 2018 Budget features a strong rakyat-centric theme, as widely anticipated, especially with the coming GE14 which must be called no later than June 2018. This was evidenced by the budget-specific measures announced, specifically on its high emphasis on addressing the rising cost of living. Civil servants, which constitute a major voting bloc of the ruling coalition, will be set to enjoy several goodies including financing for public sector housing, time-based promotions, perquisites on healthcare and in-house education for Doctorate and Masters programmes. Furthermore, the Budget also earmarks RM1,500 payment for all public servants (payable as a RM1,000 payment in January and another RM500 towards Eid-ul-Fitr). This includes government retirees who will receive half of these payments. The budget also extends a handful of goodies for the Chinese and Indian community, in addition to the usual initiatives for Bumiputera community. PP7004/02/2013(031762) Page 9 of 14
  10. Economic Viewpoint 30 October 2017 Budget Specific Highlights Addressing rising cost of living . Key measures noted in Budget 2018 include the management of rising cost of living. Towards these objectives, the Budget includes three broad strategies including direct increase in disposable income, creation of jobs and facilitation of entrepreneurship and subsidies. Of note the budget moots a cut in income tax rates for which largely favours middle-income class. Lower tax rate will be implemented on income tiers of RM20,001-RM35,000 (5% to 3%), RM35,001-RM50,000 (10% to 8%) and RM50,001-RM70,000 (16%-14%). This is expected to free 261k from paying income tax and is projected to increase disposable income by around RM300-RM1,000 per taxpayer. Meanwhile, BR1M cash hand-out programme would continue for the seventh year running with a similar allocation as this year’s RM6.8b. Table 6: BR1M Cash Transfer (Per Household/Individual) Income Groups (RM) < 1,000 (> 21 yrs) 2012 500 2013 1,000 to 3,000 3,001 to 4,000 Individuals (> 21 yrs) earning < 2,000 2014 2015 500 250 Bereavement Scheme/i-BR1M/Takaful Insurance 2016 2017F 2018F 1,050 1,200 1,200 650 950 1,000 1,200 1,200 450 750 800 900 900 300 350 400 450 450 50 1,000 1,000 1,000 1,000 Total Allocation (RM billion) 2.2 3.0 4.6 4.9 5.9 6.8 Total Sum Disbursed (RM billion) 2.6 2.9 4.5 5.0 5.4 NA NA Households (Million) 5.2 4.3 4.5 4.6 4.2 5.2 5.2 2.7 2.7 2.7 3.1 3.1 3.1 Unmarried/single Individuals (Million) Total Benefitting BR1M (Million) Average Payment Per Recipient (RM) 6.8 5.2 7.0 7.2 7.3 7.3 7.3 7.3 500.0 414.3 625.0 684.9 739.7 931.5 931.5 Source: Ministry of Finance, Annual Budget Speeches, The Star, Bernama, Kenanga Research, F: Budget Forecast Enhancing job opportunities. The Budget also seeks to enhance income, be it by creating job opportunities or facilitating entrepreneurship through microfinancing programmes such as the 1AZAM (allocated RM60m), Malaysia Digital Economy Corporation (MDEC)’s eRezeki, eUsahawan and eLadang (allocated RM100m). Similar to the previous year, Budget also seek to leverage on rising popularity of ride-sharing programme as a means of income creation, of which a RM5,000 grant will be provided for qualifying registered drivers. Subsidising the poor. On cost of basic necessities, among the flagship measures include the RM3.9b subsidy for various goods, transportation, electricity and toll, while establishing around 50 Kedai Rakyat 1Malaysia 2.0 (KR1M 2.0) which will sell basic necessities for rice, sugar, oil, flour and cooking gas for a subsidised prices. On a more administrative front, the Budget also proposes direct employment of domestic help without requirements for an agent. Spotlight on affordable housing. Budget 2018 attempts to address the increasingly politicised housing ownership issue, the government sought to expand affordable housing schemes, step-up financing and other funding for housing repairs. While we are positive on greater access on housing, we are mildly cautious on the risk profiles of these financing. Developing (and maintaining) people-friendly infrastructure. As per its announcement on development expenditure, the Budget will allocate funds for the preparation of people-friendly infrastructures. This includes fund allocation for the Pan Borneo Highway (RM2b), maintenance of public infrastructure (PIA) and Basic Infrastructure Projects (PIAS) (RM500m), provision of electricity and clean water to rural areas (RM672m) which excludes a further allocation for provision of clean water to Sabah and Sarawak (RM420m). Maintaining defence and public order. The budget will also allocate more than RM14b to the Armed Forces and almost RM9b to the Royal Malaysian Police Force. Main programmes to be implemented include the purchase and maintenance of defence assets (RM3b), construction of police headquarters and stations and purchase of firearms (RM720m), upgrading medical facilities for veteran armed forces (RM40m), among others. PP7004/02/2013(031762) Page 10 of 14
  11. Economic Viewpoint 30 October 2017 Conclusion Optimistic budget underpinned by stronger growth . With growth set to outperform initial expectations for 2017 (as evidenced by stronger 1H17 growth) and likely to remain elevated (if tapering slightly), the stronger economy creates a solid foundation for the 2018 and provides a wider fiscal space for the government to manoeuvre. Overall, we are optimistic that the government’s 2017 fiscal deficit target (3.0% of GDP) is likely to be achievable. While we are more cautious on the government hitting its 2018 fiscal deficit target (2.8% vs. the house estimate of 2.9%) on tapering growth in 2018, with the right economic conditions and fiscal management, the MoF’s target is somewhat achievable, particularly if the government aggressively consolidate its fiscal position in 2H18 post GE14. ...alongside a confluence of positive factors. Improved fiscal prospects also stems from a host of positive exogenous factors, including rising oil prices (which helped provide a boost to Petroleum-related revenue), rising global economy driving external demand and global investments, among others. A balance of consolidation and election theme. The 2018 budget appears to strike a balance between its consolidation exercise while remaining cognisant of the need to maintain growth and manage voter sentiments, especially as we move into GE14 by August 2018. The consolidation theme is highlighted by capped 2018 growth in DEVEX though higher OPEX growth – especially with regards to higher social subsidies – suggests some overtures made, possibly to win votes. Applying restraint. But to achieve the long-term goal of a balance budget, the government still needs to apply tougher fiscal discipline. To achieve a lower deficit target, the government is targeting total budget spending (OPEX+DEVEX) to remain below 20% of nominal GDP in the coming years (2017: 19.8% of GDP, 2018: 19.4%). In 2016, total gross expenditure reached a record low of 20.5% of GDP. Equally, this also requires that total revenue need to grow by more than 6.0% annually. This is not an easy feat given the uncertainty in the global economy and fluctuating commodity prices. PP7004/02/2013(031762) Page 11 of 14
  12. Economic Viewpoint 30 October 2017 Table 7 : Key Major Budget 2018 Proposed Measures Area Measures  Construction of East Coast Rail Link (ECRL) to begin in January 2018.  MRT2 Line from Sungai Buloh – Serdang – Putrajaya Project, spanning 52 kilometres with an estimated construction cost of RM32b.  RM6.5b for basic rural infrastructure of which RM2.2b for the Pan Borneo Highway Infrastructure  Allocate RM3b to Transportation Development Fund to procure vessels as well as develop aerospace technology industry and rail.  Allocate RM1b to Public Transportation Fund for working capital and procurement of assets such as buses and taxis.  Allocate RM110m to provide an alternative road to Port Klang.  Feasibility study for the construction of a bridge connecting Labuan with Sabah mainland.  Extend the incentive period for Accelerated Capital Allowance of 200% on automation equipment from year of assessment 2018 to year of assessment 2020 and extend the incentive period for Accelerated Capital Allowance of 200% for manufacturing and manufacturing-related services sectors.  Provide a sum of RM5b under the Green Technology Financing Scheme to promote investment in green technology industry. Business/Investment  Allocate RM1b for the Five Main Corridors (south Perak region, Bukit Kayu Hitam Duty-Free Zone, Tok Bali, Kelantan, Baleh Dam, Sarawak).  Allocation of RM7b under the Skim Jaminan Pembiayaan Perniagaan (SJPP); RM1b is provided as loans to companies with 70% guaranteed by the Government.  RM6.5b assistance for farmers, fishermen, smallholders and rubber tappers  Provide tax exemption on stamp duties for sales and purchase transactions of ExchangeTraded Fund and Structured Warrants for 3 years, effective January 2018.  A sum of RM1b is provided by major institutional investors for investment in venture capital in main selected sectors. Financial market  Tax deduction equivalent to the amount of the investment made in the venture companies, limited to a maximum of RM20m annually  Extend the income tax exemption incentive equivalent to the amount of investment made by an angel investor in venture companies to 31 December 2020.  Allocate RM1.5b under SJPP  RM6.5b is allocated to assist the agriculture sector. Agriculture  RM2.3b is allocated to provide assistance and incentive to paddy farmers, rubber smallholders and fishermen.  About RM500m is allocated to improve irrigation infrastructure and upgrade plantation roads. Healthcare  An allocation of RM27b for quality healthcare including RM4.1b for medical supplies & consumable items; RM1.4b for upgrading facilities; and building new hospitals & wards. PP7004/02/2013(031762) Page 12 of 14
  13. Economic Viewpoint 30 October 2017 Table 7 : Budget 2018 government measures (cont’d) Area Measures  Individual income tax rates reduction of two percentage points: i) From RM20,001 to RM35,000, the rate is reduced from 5% to 3%; ii) From RM35,001 to RM50,000, the rate is reduced from 10% to 8% iii) From RM50,001 to RM70,000, the rate is reduced from 16% to 14%  Initial Savings Fund of RM200 for Malaysian baby born from 1 January 2018 to 2022.  Special distribution amounting to 1.5b additional units of Amanah Saham 1Malaysia for the Indian community, up to 30,000 units for each investor. Social welfare  BR1M recipients to continue benefit from cash transfer of up to RM1,200 with total allocation of RM6.8b (same as last year)  Allocate RM3.9b for goods and transport subsidies.  An allocation of RM1.7b to help senior citizens, people with disability, and abused children. This includes increase allowance for senior citizens by RM50 to RM350 per month; Increase allowance for working and unemployed PWDs as well as care takers of PWDs by RM50 per month.  A special payment of RM1,500 for all public servants. Cash assistance worth RM1,500 to head of small communities (penghulus, tok batin, imam, etc) Security  Allocation of RM14b for Malaysian Armed Forces (ATM), almost RM9b for Royal Malaysia Police (PDRM) and more than RM900m to Malaysian Maritime Enforcement Agency (APMM).  Allocation of RM3b for the procuring and maintaining of defence assets.  2020 as the Visit Malaysia Year. Tourism Stimulus  RM2b is allocated to SME Tourism Fund to provide soft loans to tour operators with an interest subsidy of 2%; RM1b is provided to the Tourism Infrastructure Development Fund.  Expansion of eVisa regional hub by facilitating visa application worldwide.  An allocation of RM2.2b to increase home-ownership for the rakyat – 17,300 units of People’s Housing Programme; 3,000 units of People’s Friendly Home under SPNB. Housing affordability  Stamp duty exemption for loan agreement and letter of consent to transfer for abandoned housing projects.  A 50% tax exemption on rental income received by resident individuals not exceeding RM2,000 per month.  An allocation of RM2.2b for scholarships provided by Public Service Department, Ministry of Higher Education and Ministry of Health.  RM2.5b is allocated for the rebuild and upgrade of 2,000 dilapidated schools using IBS. Education Stimulus  TVET Malaysia Masterplan to be implemented with a sum of RM4.9b.  Construction of pre-schools, PERMATA centres, secondary schools, vocational colleges and a matriculation centre with an allocation of RM654m.  RM400m allocation for R&D grant for local universities Source: Budget 2018 Speech, Kenanga Research PP7004/02/2013(031762) Page 13 of 14
  14. Economic Viewpoint 30 October 2017 KENANGA MACROECONOMIC FORECAST 2012 2013 2014 2015 2016 2017F 2018F Real GDP (%YoY) 5.5 4.7 6.0 5.0 4.2 5.4 4.9 Consumer Price Index (avg.) 1.7 2.1 3.2 2.1 2.1 4.1 3.5 Current Account Balance (% of GDP) 5.2 3.5 4.4 3.0 2.4 2.1 1.5 Fiscal Balance (% of GDP) -4.3 -3.8 -3.4 -3.2 -3.1 -3.0 -2.9 Unemployment rate (% ) 3.0 3.1 2.9 3.2 3.3 3.4 3.4 Manufacturing output (%YoY) 5.2 4.2 6.1 4.8 4.3 5.7 4.5 Exports of goods (%YoY) 0.7 2.5 6.4 1.6 1.1 21.6 7.0 3.00 3.00 3.25 3.25 3.00 3.00 3.00 Exchange rate: Ringgit/US$ (avg.) 3.0886 3.1501 3.2729 3.9074 4.1424 4.3000 4.2000 Exchange rate: Ringgit/US$ (end period) 3.0580 3.2757 3.4973 4.2943 4.4862 4.1500 4.1000 2,764 2,371 2,384 2,166 2,649 2,700 2,400 Overnight Policy Rate (end period) Palm oil: RM/tonne (avg.) Palm oil: RM/tonne (end-period) 2,231 2,573 2,283 2,198 3,203 2,700 2,400 Crude Oil (Brent)- US$/barrel (avg.) 111.68 108.70 99.45 53.56 45.10 51.00 NA Crude Oil (Brent)- US$/barrel (end-period) 111.11 110.80 57.33 37.28 56.82 50.40 NA Source: BNM, Ministry of Finance, Dept of Statistics, Bloomberg, CEIC, PORIM, Kenanga Research, F=Forecast This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) Level 12, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: research@kenanga.com.my Chan Ken Yew Head of Research KENANGA INVESTMENT BANK BERHAD (15678-H) Level 12, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: research@kenanga.com.my Chan Ken Yew Head of Research PP7004/02/2013(031762) Page 14 of 14