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Nikkei Markets

AT A GLANCE: Reactions To Malaysia's 2018 Budget

By Kuala Lumpur Newsroom
Nikkei Markets
KUALA LUMPUR (Oct 27) -- Here's a summary of reactions by fund managers, economists and analysts and to Malaysia's 2018 budget announced today:


The budget is 'positive' for the equity market on various incentives and a more specific timeline to speed up mega infrastructure projects. It is neutral for the consumer sector, as the market had mostly factored in all the 'goodies' announced. -The tourism sector will benefit from budget allocations and more airports, particularly in East Malaysia.

The alternative trading system will quicken equity market transactions, stamp duty exemption for ETFs, structured warrants also expected to raise trading activities in such products.


The expansionary budget is likely to boost investors' confidence as it cleared some uncertainties ahead of general election, which will be the next theme for the stock market. The personal tax cut will be neutral for the consumer sector, as 2% cut to the middle-income group is not significant enough to help spending.

Building material companies such as cement, steel, bricks manufacturers will see higher orders from infrastructure/affordable housing projects. Although there is expectation of construction jobs being awarded, most of the contractors' share prices have overrun, so we shall switch focus to the building material sector. Airline companies, namely Malaysia Airline, AirAsia will enjoy lower costs from GST relief on aircraft imports. Medical tourism sector is also a 'winner', beneficiaries include IHH Healthcare and KPJ Healthcare.


The stimulus steps such as tax cuts need not necessarily turn into spending, but could be lead to short-term speculative activities in consumer stocks.

Budget likely a non-event to equity market, all the 'sweets' are within expectation. Budget incentives and fund allocations in sectors like construction, tourism, healthcare mostly continuation of earlier policies.


It has to be a general election budget to address all main issues related to the people. It will help to improve support among fence sitters who also will wait to see the implementation until the dissolvement of parliament. Implementation and monitoring is pivotal to see the outcome reach all the target groups.


Overall, the 2018 budget supports our view that the government remains committed to its fiscal consolidation agenda, despite the upcoming general election, which we expect to be held sometime in March to May 2018. For this year, the government's maintenance of its 2017 fiscal deficit target is also consistent with our view of a sharp fiscal tightening in 2H 2017, with the strong export sector boosting growth and offsetting the fiscal drag.

We expect a similar pattern in 2018, with government spending disbursements being front-loaded to the start of the year (ahead of the elections) before running tight fiscal policy in 2H 2018 to achieve its fiscal deficit target of 2.8% of GDP. We continue to expect Prime Minister Najib Razak and his Barisan Nasional coalition to remain in power after the election which, in our view, implies the government will stay on a path of fiscal consolidation over the medium term that, in turn, should support Malaysia's sovereign credit ratings.


Oil revenue may likely continue to play a lesser role in driving overall revenues as other revenues (GST, company tax) increases further. Likewise, the sustained collection of tax revenue is expected to be supported by a stronger growth in companies income tax (CITA), on the back of resilient economic activity. The MOF also states that tax revenue would likely improve via the enhancement of tax compliance and administration through its establishment of the collection intelligence arrangement. We believe the MOF's above assumptions sound reasonable.

We expect inflation to moderate to 2.7%, albeit staying elevated, from 3.8% expected for 2017. We are of the view that BNM would likely keep the OPR unchanged at the current level of 3% for the rest of 2017, as inflation is mainly driven by cost-push factors. We believe the central bank would likely increase the OPR by 25bps to 3.25% next year, in tandem with monetary policy tightening by major global central banks and with the Malaysian economy improving further.


Malaysia's fiscal revenue has improved structurally following the introduction of the Goods and Services Tax in 2015, with continued improvement in tax administration and collection. This has rendered Malaysia fiscal position more resilient against oil price shocks in recent years, and is reflected in the expected 6.4% growth in fiscal revenue in 2018 (based on a realistic oil price assumption of USD52 per barrel). This is slightly faster than the estimated 6.1% growth in 2016, and a stark contrast to the 3.0% contraction in 2015. It provides sufficient fiscal space for the various growth strategies under Budget 2018 while maintaining overall fiscal consolidation.

Given the anticipated reduction in the fiscal deficit, we expect the government's debt level to come in at 50.2% of GDP in 2018 (RAM's projection for 2017: 51.3% of GDP). Notably, development expenditure has been relatively flat since 2013 and remains so under Budget 2018, despite the roll-out of sizeable infrastructure projects in the last few years due to off-balance sheet financing. This has translated into a heftier government-guaranteed debt load, from 11.8% of GDP in 2011 to 16.9% in 2Q 2017.


Budget 2018 aims to cut fiscal deficit/GDP ratio to 2.8% and reiterate the 3.0% target in 2017, which reinforces fiscal discipline and is seen as marginally credit positive to sovereign rating. For government bonds supply, we expect a gross issuance of MYR107b in 2018 and revise up our forecast in 2017 slightly to MYR107.5b from MYR107b.

We continue to expect ample supply of duration in 2018 as the government will likely continue to actively manage maturity profile to reduce refinancing risk.
- By Kuala Lumpur Newsroom;; +60320267363
- Edited by Mrigank Dhaniwala
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- Copyright (c) 2017 Nikkei NewsRise Asia Pte Ltd.

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