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Economy

Malaysia's construction sector likely to gain the most from next year's budget

KUALA LUMPUR (NewsRise) -- Malaysian construction companies stand to gain the most after the government announced plans to push ahead with projects ranging from rail to bridges worth nearly $15 billion to develop infrastructure and spur economic growth through the next year, analysts said.

In the federal budget unveiled on Friday, the government announced laying a 600-km rail network, dubbed East Coast Rail Line that will cost an estimated 55 billion ringgit ($13 billion). Malaysia also plans to spend 1.2 billion ringgit to build and upgrade some 616 kilometers of roads and bridges in the country.

"The increase in development expenditure and sustained infrastructure spending is positive for the construction companies," said Affin Hwang Investment Bank's analyst Chue Kwok-Yan. "This ensures a healthy pipeline of projects for the construction companies to grow their order books."

For the past several years, Malaysia has been spending hefty cash to develop and modernize some of its infrastructure to support an economy that grew an average 6.0% annually for the past six decades. Next year, the third-largest Southeast Asian economy is expected to expand between 4.0% and 5.0%.

Once an agrarian economy, Malaysia has emerged as one of the most industrialized countries in the region as it channeled part of cash earned from oil exports to build roads, ports and other massive infrastructure projects including the iconic Petronas twin-tower.

Economic growth however has decelerated in recent quarters due to slump in commodity prices and sluggish global demand for its exports. In the second quarter, Malaysia's economy grew 4% year-on-year, the slowest pace in nearly seven years.

Still, construction remains the fastest-growing activity although the sector accounts for less than 5% of gross domestic product. The sector is expected to grow 8.3% in 2017, according to official forecast, supported mainly by infrastructure projects such as mass rapid transit project in the capital city of Kuala Lumpur.

"We expect construction growth to remain strong in 2017," buoyed by sustained development expenditure, infrastructure and rural development, said Hong Leong Investment Bank.

Between January and September, construction contracts worth 49.5 billion ringgit has been awarded in Malaysia. That was a record high and more than twice the value of projects awarded in 2015, the bank noted.

Beneficiaries of Malaysia's fiscal largesse in the construction sector includes Gamuda, IJM Corporation and Sunway Construction, said UOB Kay Hian's analyst Vincent Khoo. Building materials firms such as steel producer Ann Joo Resources may also benefit from Budget 2017, he added.

Malaysia is also rolling out incentives for first-time homebuyers that include full stamp duty exemption, which in turn is expected to boost mass housing projects.

Analysts however, were divided over the impact of the budget proposals on construction and development of residential properties as the government continues to grapple with one of the most leveraged households in Asia.

"There is no clear incentive for private developers in Budget 2017 to tackle the relatively weaker property market in Malaysia, which has witnessed weaker take-ups and slower loan approvals," said AllianceDBS Research's analyst Quah He Wei.

Household debt, as a percentage of the economy, rose to 89% at the end of 2015 from 87% in 2014. That has limited consumers' ability to secure fresh bank loans, hurting sales of big-ticket items such as cars and homes in Malaysia.

The construction index at Malaysia's stock exchange has risen 3% this month, outpacing a 1.5% gain of the benchmark FTSE Bursa Malaysia KLCI. For this year, the construction index has gained 6.1%.

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