Budget Highlights

• 2018 GDP Growth of 5.0% - 5.5%

• RM4.9 bln for TVET Malaysia Master Plan

• 2.8% Fiscal Deficit Target for 2018

• Enhance Quality and Affordability Of Healthcare Services

• Federal Government Debt Target of 50.0%

• Personal income Tax reduction by 2.0% for M40

• RM6.5 bln Boost for Agricultural Sector

• More Affordable Housing Projects

• Transportation Projects Remains on the Fore

• RM1.0 bln Institutional Investment in Capital Markets

Summary

Touted as a people centric and populist budget ahead of the next General Election in 2018, Budget 2018 continues to highlight the government’s plan to tackle the high living cost and home ownership issue. Carrying the theme Prospering An Inclusive Economy, Balancing Between Wordly And Hereafter, For The Wellbeing Of Rakyat, Towards The TN50 Aspiration is the third series of the five Budgets under the 11th Malaysia Plan, before Malaysia transforms into a high-income and advanced economy by 2020. With the country’s fiscal deficit looks to decline towards 3.0% in 2017, Budget 2018 aims to trim the country’s fiscal deficit further to 2.8% in 2018 – in tandem with the government’s fiscal consolidation target. With several “goodies” being announced such as personal income tax reduction for the M40 group, the continuation of BR1M and pension handouts and more affordable housing projects, we deem the Budget is slightly positive as there were few giveaways to corporates.

With the economic recovery on track due stronger crude oil and crude palm oil prices, firm export performance and improved domestic sentiments, Malaysia’s GDP is expected to improve by 5.0-5.5% in 2018 (slightly lower vs. 5.2%-5.7% forecasted in 2017). The aforementioned improvement will be supported by the increase in gross national income per capita (+5.1% Y.o.Y) to RM42,777 in 2018. Although private investment is estimated to rise 8.9% Y.o.Y and private consumption by 6.8% Y.o.Y in 2018, public sector expenditure is likely to decline 0.4% Y.o.Y on lower capital outlay from state owned corporations.

In the meantime, the development expenditure is expected to increase marginally by 0.1% Y.o.Y to RM46.0 bln, whilst operating expenditure will rise at a quicker pace to RM234.3 bln (+6.5% Y.o.Y) in 2018. The increases will be back by higher Goods and Services Tax (GST) collection at RM43.8 bln for 2018, up from RM41.5 bln estimated in 2017. The aforementioned collection would make up to 18.3% of the forecasted government revenue of RM239.9 bln in 2018. There were also several additional items added into the zero-rated basket as the Government continues to streamline its tax collection.

Based on the Brent crude oil price assumption of US$52 per barrel in 2018 (slightly above US$45 per barrel in 2017 as the global oil market gears towards rebalancing following OPEC’s move to cut their production), the total tax revenue collection is expected to reach RM164.1 bln, making up to 68.4% of estimated total revenue in 2018. Already Brent crude oil prices YTD is at US$52.99 – implying that the government in well on track in meet its fiscal deficit target in 2017.

Malaysia’s inflation rate, meanwhile, is expected to moderate to 2.5%-3.5% in 2018 vs. the estimates of 3.0%-4.0% in 2017 as the latter’s higher figure was driven by the cost-pass-through mechanism in fuels and lubricants to end-users. As of June 2017, the government debt stood at 50.9% of GDP vs. 52.7% in 2016 - well below the self-imposed ceiling of 55.0%. Following the country’s sturdy balance sheet, Fitch Ratings has re-affirmed Malaysia A- rating with a stable outlook.

The tourism sector was given a boost with an allocation of RM2.0 bln as Malaysia prepares for the Visit Malaysia Year 2020, hosting a series of key international meetings such as Asia-Pacific Economic Co-operation (APEC), World Congress of IT (WCIT) and Commonwealth Heads of Government Meeting (CHOGM). As of 2016, Malaysia was ranked 12th in terms of tourist arrivals as reported in the World Tourism Organisation Report. A sum of RM1.0 bln will be allocated for Tourism Infrastructure Development Fund as soft loans, while RM500.0 mln will be utilise for development and promotion activities through improved tourism facilities, homestay and eco-tourism programmes. The construction of a new airport in Mukah, Sarawak and the upgrading of both Penang and Langkawi international airports will attract additional tourists.

Budget 2018 reiterated a flurry of mega-infrastructure transportation projects, namely: the RM32.0 bln Klang Valley Mass Rapid Transit 2 (KVMRT2) that spans across 52 km housing 37 stations, Light Railway Transit 3 (LRT3), RM5.0 bln West Coast Expressway, RM230.0 mln Central Spine Road, Pan Borneo Highway project and an additional RM934.0 mln for construction of roads in rural areas. The improvement in connectivity will alleviate clogged roads conditions, especially during peak working hours, festive seasons and extended weekend breaks. In the meantime, the East Coast Rail Link (ECRL) project connecting Port Klang to Pengkalan Kubor, Kelantan will see fiscal works commencing in January 2018.

The education sector saw an increased allocation of RM4.9 bln (up from RM4.6 bln in the previous year’s budget) for the Technical and Vocational Education Training (TVET) Master Plan as the country aims to produce more technically competent manpower. In addition, a new allocation of RM40.0 mln will be channelled towards Science, Technology, Engineering and Mathematics (STEM) in order to train teachers with the collaboration of the Academy of Science Malaysia (ASM).

In order to enhance the quality and provide affordability healthcare services, the healthcare sector saw a RM27.0 bln allocation (an increment of RM25.0 bln in Budget 2017), including RM1.40 bln to upgrade and maintain health facilities, medical equipment and ambulances and RM100.0 mln to upgrade hospitals and clinics electrical/wiring systems. The introduction of Flagship Medical Tourism Hospital Programme, an incentive for private hospitals to attract medical tourist and the extension of investment tax allowance (ITA) of 100.0% for medical tourism until 31st December 2020 is part of the government’s initiative to boost medical tourism.

With the rising cost of living remaining as one of the top issues in the country, the government has announced a personal tax reduction of 2.0% for middle income household earning between RM20,000-RM70,000 per annum. The aforementioned measure is estimated to increase an individual’s disposable income by RM300-RM1,000 per year and thus providing approximately RM1.50 bln in additional disposable income. Separately, cash handouts up to RM1,200 from the Bantuan Rakyat 1 Malaysia (BR1M) programme will continue to benefit 7.0 mln recipients. Both measures are aimed at narrowing the income gap in the country.

In bid to increase home-ownership which has been the key concern for the majority of the population, the government has allocated RM2.0 bln to develop a total of 237,900 units of under various housing schemes such as Perumahan Rakyat 1Malaysia (PR1MA), 1Malaysia Civil Servants Housing Programme (PPA1M) and People’s Housing Programme (PPR), of which the former scheme saw a total of 259,882 units approved for construction.

To invigorate and strengthen the financial market, there will be tax exemption on stamp duties imposed on contract notes for sales and purchase transactions of Exchange-Traded Fund and Structured Warrants for three years, effective January 2018. A sum of RM1.0 bln under Budget 2018 will also be allocated to major institutional investors for investment in venture capital in main selected sectors, coordinated by Securities Commission (SC) will continue to stimulate the capital markets.

Source: Mplus Research - 30 Oct 2017