The Mid-Term Review of the 11th Malaysia Plan by the Pakatan Harapan (PH) government focused more on realistic economic targets while stressing on the six pillars to provide a new development focus with 19 priority areas and 66 strategies to further boost domestic economy. Besides, the government intends to reform the public service towards greater transparency and accountability.

In line with our expectation, the GDP is projected to grow at a slower pace of 4.5%–5.5% between 2018 and 2020, supported by sustained domestic demand, especially from private sector expenditure and moderate inflation of 2%–3%. While the government has acknowledged that it is able to meet the minimum income threshold of a high-income nation by 2024 and not 202, there is still room to achieve the threshold earlier. Besides, the focus is also on raising purchasing power across the board, including the B40.

Looking at sectors, in line with our view, the focus is still on services (consumption-related services), manufacturing (high value-added, diverse and complex products), E&E, machinery and equipment, chemicals and chemical products, aerospace and medical devices, the adoption of Industry 4.0 to enhance productivity through automation and technological adoption), and logistics & healthcare to drive the economy. Areas like agriculture, mining, energy, construction and exports will continue to play their respective important roles. Emphasis is also on raising SMEs’ contribution to 41% of national GDP by 2020, from 37.1% in 2017.

On the fiscal front, the government expects the fiscal deficit to go beyond the target set during the last budget for a short period before reverting to the fiscal consolidation path with a target set at 3% to GDP in 2020 through multi-pronged approach. This falls in line with our view given the huge public debt of RM1.087tril and the need to refund RM35bil in taxes and GST. We foresee room for the fiscal deficit to hover around 3.6%–4.9% of GDP in 2019, much depending on how the government is able to generate revenue and cut expenditure. However, we expect the fiscal deficit to consolidate to 2.9%–3.2% of GDP in 2020.

The plus point is that the government expects the current account of the balance of payment to remain in surplus. We project the current account surplus to be around 2%–2.5% of GDP over the next two year. Hence, with the economy unlikely to fall into “twin” deficits, the pressure on the ringgit to weaken will be much lesser as opposed to countries with “twin” deficits.

Finally, the government targets to reduce the reliance on foreign workers which are now at a high 2.3mil through greater levels of automation and innovation by the industries in areas like agriculture and construction. The management of foreign workers will also be enhanced to ensure that the foreign workers return home upon the completion of their employment contracts. To address the issue of youth unemployment, the technical and vocational education and training (TVET) programmes will also be reviewed to foster stronger industry-academia linkages to improve the current mismatch of skills.

Source: AmInvest Research - 19 Oct 2018