The Budget 2018, which is set to be tabled on 27 October, is expected to continue focusing on the government’s commitment in ensuring the economy expands at a healthy pace, and at the same time reduce the fiscal deficit and address the public debt. The overall objective is to bring prosperity to the nation and promote the well-being of the Rakyat in line with the theme of Budget 2018 “Shaping the Future”. We expect this budget to be inclusive.

• We expect the government to revisit its 2017 GDP growth projection of 4% – 5% range in Budget 2018 as the economy has grown beyond expectation in 1Q2017 and 2Q2017 by 5.6% and 5.8% respectively, bringing the 1H2017 average to 5.7%. The robust growth was supported by strong exports and continued to be anchored by domestic demand. At the same time, foreign direct investments rose to RM17bil in 1Q2017 and RM8.2bil in 2Q2017 mainly in the services, mining and manufacturing sectors. We project the full-year 2017 GDP to hover around 5.7% – 5.9%, hence expecting an upwards revision to around 5.5% – 6.0% in Budget 2018.

• Given the stabilising commodity prices, better tax collection, improving global growth in 2017 and paired with the ongoing fiscal consolidation, the 3.0% budget deficit target for 2017 is likely to be attained. We believe the fiscal deficit for 2018 should improve marginally to 2.9% to GDP on expectation of higher revenue from stronger crude oil prices and tax collection with prudent spending.

• SMEs and digital economy form the crux of the economic activity in Malaysia. We expect the ongoing initiatives under the SME Masterplan to continue boosting SME activities with prudent incentives to support this business segment. Given the high priority on digital economy, the budget is expected to focus on facilitating the Industry 4.0 (4th Industrial Revolution: next phase in digitisation of the manufacturing sector), promoting high-technology industries (automation, robotic development, cloud computing and big data), and high-tech ecosystem such as original design manufacturers (ODM) or integrated device manufacturers (IDM) which have in-house R&D and capable of creating high-tech products under their own brand, and also continue emphasising on the e-commerce ecosystem.

• On the living cost which impacts the consumer industry, we expect the budget to continue focusing on targeted incentives for households to address the rising cost of living. The government will continue to lend support to civil servants (1.6mil) and the middle- and low-income groups or bottom 60% (B60) to sustain consumer spending, who account for more than 50% of the economy.

The government previously distributed RM5.9bil and RM6.8bil in 2016 and 2017 respectively through its BR1M programme. This is likely to recur in Budget 2018. We think the voluntary reduction in statutory contribution rates for employees to the EPF is likely to be extended beyond Dec 2018. To recap, under the recalibrated Budget 2016 announced in Jan 2016, the statutory contribution rate for employees below 60 years old has been reduced from 11% of the basic salary to 8%, while for those above 60 from 5.5% to 4%, from March 2016 to Dec 2018.

• Meanwhile the social expenditure is expected to focus on: (1) education & training to build a progressive and inclusive society through improving access to education at all levels, provision of scholarships as well as further emphasis on the use of the English language; (2) healthcare facilities and services via upgrading of hospitals and clinics as well as to stronger cooperation with private sector and NGOs to reduce overcrowding in public hospitals, rising drug cost and low doctor-to-population ratio ; and (3) building more affordable homes for the low-income group such as PR1MA, MyBeautiful New Home, People’s Housing Programme (PPR) and People’s Friendly Home, and introduce measures to support home buyers as well as developers.

• The auto sector, hurt by high input costs due the ringgit's weakness, could get relief in the form of further tax exemption for localisation, and a reduction in excise duties and/or import duties. These savings could help lift carmakers' margins from the doldrums, as well as lower car prices to stimulate demand. While the current incentives on hybrid and electric vehicles play a role in contributing to a cleaner environment, the impact is very limited given that hybrid and electric vehicles in the market currently are largely premium models that sell in low volumes. We believe the incentives may be extended to include more mass-market energy efficient vehicles (EEVs). After all, EEVs offer lower emissions and better fuel efficiency. Incentives to mitigate the 6% GST to jog consumer spending on automobiles – entry-level hatchbacks and sedans for the low-income group (the bottom 40% of households or B40) and civil servants, and mid-range sedans or cheaper crossovers for the middle income group (M40).

• Construction activities will continue to benefit from the infrastructure activities, upgrading of road works, nonresidential activities like mixed commercial developments, and residential properties led by affordable housing programmes. Incentives are expected for contractors who adopt new building technologies such as the industrialised building system (IBS) and aluminium formwork system which help reduce wastage and save construction time, encourage contractors to invest in new construction machineries, and collaborate with the government to train skilled crane and machinery operators

• For the financial sector, we hope the government will extend the 20% stamp duty exemption on the principal or primary instrument of financing in accordance to Syariah principles, and further tax incentives for loan instruments under Syariah principles, particularly for SME borrowers. The government is likely to reaffirm its support to smalland mid-cap stocks listed on Bursa Malaysia by mandating government-linked funds to actively invest in them again, as well as forking out allocation to expand the Mid and Small Cap (MidS) Research Scheme. To recap, under Budget 2017, the government has mandated GLC funds to allocate up to RM3bil to invest in this space. The MidS Research Scheme has been launched with an initial funding of RM75mil.We foresee more incentives to boost participation in private retirement schemes (PRS).

• The government is unlikely to increase gaming taxes for casino and lottery operators under gaming activities. We believe Genting Malaysia has scored some brownie points with the government by proposing to spend about RM10bil in the Genting Integrated Tourism Plan (GITP) at Resorts World Genting, Malaysia. For the lottery industry, ticket sales have been hit by poor consumer spending coupled with stiff competition from illegal operators.

• We foresee continued focus on medical tourism under the healthcare sector given its tremendous spillover/multiplier effects on the GDP as it stimulates demand which benefits the wholesale and retail sector as well as services i.e. hotels, tourism, food, logistics, entertainment/leisure and shopping. This could see a possible extension of the current 90-day visa for medical tourists and their companions, attracting foreign medical and academic professionals, and revisit the national healthcare insurance.

• We expect the government to propose funds for aquaculture, cattle farming and planting of fruits and vegetables, which will benefit smallholders or small-scale farmers under the plantation/agriculture segment. There could be an extension of replanting subsidies to oil palm smallholders, estimated at about RM500-1,000/ha vs. replanting cost of RM8,000-12,000/ha.

• The property sector could see some measures that support the buyers by raising the EPF withdrawal limit to purchase home from Account 2 to 50% from 30% currently, and reduce the incidental costs of owning an affordable home by extending the full waiver of stamp duty for first-time buyers of affordable homes beyond 31 Dec 2018 (as announced in Budget 2017), and raising the threshold to a maximum of RM500K from RM300K currently. We believe the government is likely to retain the existing Real Property Gains Tax (RPGT) at 30%, 20% and 15% for properties sold with the third, fourth and fifth anniversary of the purchase. This is to curb speculative activities in the property market. We expect a focus on the commercial viability of affordable homes with targeted measures and waivers to support property developers.

• We see continued spending on public transport infrastructure – the MRT2, LRT3, KL-Klang bus rapid transit (BRT) and MRT3 which would benefit the transportation sector. Budget 2018 could boost the usage of public transport with the provision of more park-and-ride facilities, free shuttle services, safe and covered pedestrian walkways, flyovers and underpasses.

• We see a low possibility for another tax hike on tobacco and tobacco products in the upcoming budget. Further increases in exercise duties will only elevate illicit trades at the expense of legal sales, which will hurt rather than boost the government's tax receipts from the industry.

• The telecommunication sector could potentially enjoy capital allowances for network expansion in rural areas.

• We do not expect any policy revisions in regards to the utilities sector in the Budget. Any revisions would be crystalised through the Incentive-Based Regulation (IBR) framework. Parameters encapsulating the Imbalance Cost Pass-Through (ICPT) mechanism under the IBR framework are expected to be released in mid-Dec 2017. The IBR framework ensures that Tenaga’s earnings continue to be robust, regardless of the volatility in fuel prices. This translates to the end-user bearing the underlying risk to fluctuating fuel prices. Apart from that, the government’s subsidy rationalisation plan will see fuel subsidies gradually diminish until it reflects market prices.

• Finally, as the theme of Budget 2018 is “Shaping the Future”, we believe the government will lay the foundation for

TN50 with the aim of engaging the younger generation. As such, measures to promote technology such as improving internet connectivity and expanding growth in the digital economy would be highlighted in Budget 2018.

Source: AmInvest Research - 5 Oct 2017