Summary

Deemed as a people centric budget which focuses on addressing the high cost of living condition and house ownership issue, Budget 2017 which carries the theme Ensuring Unity and Economic Growth, Inclusive Prudent Spending, Wellbeing of the Rakyat marks the second series of five Budgets under the 11th Malaysia Plan, before transforming the country into a high-income advanced economy by 2020. Budget 2017 aims to narrow the country’s fiscal deficit to 3.0% in 2017. Meanwhile, there were several incentives including the cut in corporate tax rate, increase in BR1M handout and subsidy allocation of RM10.0 bln for fuel, cooking gas, toll charges and public transportation. However, the aforementioned moves will be upended by the recent announcement in relation to the subsidy rationalisation for cooking oil by stages, beginning from next month and subsequently be removed by 1st January 2017, coupled with the annual hike in utilities tariffs. Hence, we view the Budget as largely neutral.

Although there are multiple macro-economic headwinds such as the sluggish global economy growth, declining commodity prices and the potentially gradual interest rate hike in U.S. which resulted in the depressed local currency, Malaysia’s GDP is still expected to grow by 4.0%-5.0% in 2017 (vs. the 4.0%- 4.5% estimated for 2016) with the services and manufacturing sector steering the expansion. The said improvement will also be underpinned by the increase in private sector spending as gross national income per capita is expected to be climb 5.0% Y.o.Y to RM39,699. The private consumption is expected to hit RM230.0 bln (+8.1% Y.o.Y), driven by sustainable labour market coupled with accommodative fiscal and monetary policies.

Meanwhile, the development expenditure is expected to climb to RM46.0 bln (+2.2% Y.o.Y), while the operating expenditure will grow at a faster pace to RM 214.8 bln (+3.7% Y.o.Y) in 2017. As of 19th October, the GST collection amounts to RM30.0 bln - on track to meet the targeted GST collection of RM40.0 bln (+1.8% Y.o.Y). The government has also maintained the GST rate at 6.0% for 2017.

Based on the Brent crude oil price assumption at an average of US$45 per barrel in 2017 (higher than US$30-US$35 per barrel for 2016 due to potential rebalancing of crude oil supply and demand), the total revenue collection is expected to record RM219.7 bln (+3.4% Y.o.Y). Consequently, the fiscal deficit will decrease to 3.0% of GDP in 2017 (expected 3.1% in 2016 and 3.2% in 2015). In view of the depressed crude oil prices that will continue to see further cuts in both operational and capital expenditures, the government is reducing its reduced the dependency on oil and gas sector-related revenue from 41.3% in 2009 to 14.6% in 2016.

Malaysia’s inflation is forecast to increase by 2.0%-3.0% in 2017, marginally higher from the estimated 2.0%-2.5% in 2016, backed by the recovery in crude oil prices while the agricultural sector should see a recovery from the 1H2016 El-Nino affected yields. As the government is committed to maintain a lean balance sheet after Fitch Ratings rated Malaysia as “A-” against neighbouring countries like Thailand “BBB+”, Philippines “BBB-” and Vietnam “BB-”, the federal government debt is estimated to contract to 53.2% of GDP, compared to 54.5% recorded in 2015.

In order to boost the affordability for potential home owners, particularly for first-time home buyers, the government is planning for: (i) 9,850 houses under People’s Housing Programme (PPR) (RM134.0 mln) and (ii) 5,000 units of People’s Friendly Home (PMR) under the National Blue Ocean Strategy (NBOS) (RM200 mln), while the government remains committed to build over 30,000 units of houses under the Perumahan Rakyat 1Malaysia (PR1MA) scheme.

Apart from the reiteration of mega-infrastructure transportation projects such as the Pan Borneo Highway, Klang Valley MRT Line 2, Light Railway Transit 3, there is an additional allocation for the restoration of East Coast railway line which was destroyed by flood worth RM100.0 mln and the construction of 616 km of village roads and bridges for RM1.20 bln to enhance the connectivity within the country. Additionally, the introduction of the new 600-km East Coast Rail Line project connecting Klang Valley to the East Coast with an estimated cost of RM55.0 bln will continue to spur the construction sector growth, moving forward.

Other notable projects include an allocation of RM4.50 bln for the construction and operations of 340 units of 1Malaysia Clinics, 11 units of 1Malaysia Mobile Clinics, 959 health clinics and more than 1,800 existing rural clinics and the implementation of People-Friendly Projects for the upgrading and building of surau, small bridges, drainages, community halls, markets and kiosks (RM800.0 mln). The water services industry saw a total of RM2.39 bln being allocated; (i) upgrading of FELDA water supply system and supply of clean water (RM732.0 mln), (ii) improvement of water supply through allocation of grants and loans (RM665.0 mln), (iii) establishment of Water Supply Fund (RM500.0 mln) and (iv) Flood Mitigation Plans (RM495.0 mln).

Meanwhile, the Malaysian Communications and Multimedia Commission (MCMC) will provide RM1.0 bln to improve the coverage and quality of fixed line broadband service providers at the same price. The government has provide an allocation of RM400.0 mln, coupled with extension of eVisas to the countries in the Balkans and South Asia in order to attract 32.0 mln tourists into the country, while for the education sector, RM7.4 bln is distributed for public universities to match global standards.

Notably, the healthcare sector saw a whopping RM25.0 bln allocation of which RM450 mln will be utilise for: (i) setting up operations of 340 units of 1Malaysia Clinics, (ii) 11 units 1Malaysia Mobile Clinics, (iii) 959 units health clinics, and (iv) upgrading of more than 1,800 existing rural clinics. A total of RM424.0 mln will also be allocated as RM300 monthly living allowance and pocket money for senior citizen socio economic assistance.

In order to tackle the already high household debt at 89.1% of GDP as at end 2015, handouts from the Bantuan Rakyat 1 Malaysia (BR1M) will increase to RM6.8 bln. Household earnings below RM3,000 will obtain RM1,200 from RM1,000 previously, whilst households earnings between RM3,000 to RM4,000 will see an increment of RM100 to RM900. Additionally, personal tax relief will increase to RM2,500 per annum (from RM2,000), while the government has introduced a new scheme for corporate tax rate reduction between 1%-4%, according to the percentage increase in chargeable income.

GDP Summary

Winners and Losers

Following the re-iteration of several mega infrastructure projects such as the Klang Valley Mass Rapid Transit 2 (KVMRT2), Light Railway Transit 3 (LRT3) and Pan Borneo Highway, the construction sector remains as one of the major beneficiaries under Budget 2017. Although these projects were not, the fast tracking of the aforementioned projects will provide a spillover effect to the building materials, transportation and selective services sub-sectors, thereby providing a positive cascading effect to the broader economy.

In addition, the proposed 600-km new East Coast Rail Line connecting the Klang Valley to East Coast at an estimated cost of RM55.0 bln has reaffirmed the government’s stance to enhance the connectivity within the country. Meanwhile, a total of RM8.5 bln will be allocated for rural developments that could benefit the building and infrastructure sector, while to promote the use of public transportation, 10 new ETS train sets connecting Johor Bahru to Padang Besar will be purchase in stages up to 2019 with an allocation of RM1.10 bln.

With Malaysia being the host for the 2017 SEA and Para ASEAN Games, the government took the opportunity to boost the tourism sector through the allocation of RM400.0 mln. In the meantime, the pioneer status promotion and investment tax allowance for new four and five-star hotels to be extended to 31st December 2018 is seen as a positive move to boost the number of tourists into the country. Although there were no additions to the zero-rated GST products list, the increment in BR1M handouts will increase the disposable income for households, whilst the increment in tax relief could aid the recovery of consumer sentiment post-GST. Meanwhile, corporates in general, were again the minor winner, on the back of the introduction of new corporate tax scheme which could see reduction of 1%- 4%, depending on a firm’s chargeable income.

In the meantime, the indirect beneficiaries were the “sin” sectors like tobacco, breweries and gaming stocks due to the absence of new taxes. Already the former sector was impacted negatively by illicit cigarettes in recent years.

Market Outlook

With Budget 2017 viewed as largely neutral, we think the market’s direction will continue to be dictated by overseas events. Domestic leads are still seen as lacking with most market players likely to remain wary over the state of the economy, which is continuing to see significant challenges from the slow external sector and weak domestic market.

Hence, we continue to expect low market participations over the near-to-intermediate term as retail players could continue to stay on the sidelines amid the lack of positive catalyst, while domestic institutions will continue to provide market support. Foreign funds, meanwhile, will continue to nibble on selected Malaysian heavyweights due to the continuing accommodative interest rate environment that is seeing an increase in risk appetite for emerging market stocks. However, these funds are susceptible to a quick getaway if there are inklings of an interest rate hike in the U.S., particularly in the last FOMC meeting for 2016 in December.

Under the prevailing listless market environment, we foresee the FBM KLCI remaining on a largely sideway trend between the 1,650-1,680 levels, in tandem with the rangebound trend on key global indices. The 1,700 points level will be a formidable level to breach, in our view, as there is still insufficient market impetus to lift the key index above the level. At the same time, we also think that the upsides on Bursa Malaysia will continue to be hard to come by as market valuations are already toppish with the FBM KLCI’s 2016 and 2017 PERs of 16.7x and 15.5x already at is five-year average, as with the broader market barometer - the FBM EMAS, with its PERs at 16.7x and 14.4x respectively.

Source: M+ Online Research- 24 Oct 2016