Clearer direction as we brace for rough times

Budget 2020 remains an expansionary policy and has been designed to brace for rough times. Current external headwinds such as slower economic growth, US-China trade tensions and global uncertainties posed by factors like instability in the Middle East, are dampening global growth and trade. The government has provided a clearer direction on its vision and is focusing on sustainable growth. On that note, it has projected a growth of 4.8% for 2020. Growth is expected to come from services and construction supported by higher production from agriculture and mining with manufacturing moderating. However, our growth projection for 2020 is at 4% with the upside at 4.3% on the back of a slower global GDP at 2.8% though our fiscal deficit of 3.2% of GDP is within the government’s projection. Meanwhile, Budget 2020 also focuses on the tourism industry which we view positively. It will benefit tourism-related business activities such as food & beverages, accommodation, travel & transport, shopping and entertainment. Besides, the emphasis on the construction/infrastructure will bode well for the overall economy. Besides, the government’s seriousness in making Malaysia an attractive destination for high-technology and high value-added industries, and recognizing the importance of SMEs in driving the economic growth is seen in several measures unveiled in Budget 2020 such as addressing the SMEs financing challenges and low adoption of technology. These measures would help facilitate SMEs with the ease of doing business, leverage opportunities in new areas that include green initiatives and a faster adoption of IR 4.0. An improved public-private partnership (PPP) will further support the potential of SME.

Fixed Income View

We expect the supply of govvies in 2019 to reduce slightly to RM115bil (previously projected at RM121bil) due to the issuance of government’s Samurai bonds worth ¥200bil (equivalent to RM7.3bil based on FX rate on issuance date of 15 March 2019). For 2020, with the fiscal deficit/GDP at -3.2% that requires RM51.7bil in financing, we expect the supply of govvies to be around RM125bil without taking into consideration of the switch auction that can trim maturities in 2020 and any potential new issuance of Samurai bonds. On the MGS outlook, we remain neutral with the 10-year MGS yield projected to hover around 3.40%–3.50% levels for 2019, and in 2020 to be around 3.40%–3.60% levels. On the PDS issuance, we project it to be around RM80bil to RM90bil, excluding UJ bonds for 2019. For 2020, we project the PDS issuance to be between RM90bil and RM100bil, supported by government guarantees papers due to the resumption of suspended mega-infrastructure projects plus a low MGS yields environment, tight credit spreads and the still good demand for ringgit bonds.

Source: AmInvest Research - 14 Oct 2019