Investment Highlights

- The Prime Minister will unveil the 2014 Budget on October 25. The upcoming budget will emphasise fiscal reform measures for a more balanced growth. We expect a people-centric but fiscal-contained budget for the forthcoming year as the government stresses on:- 1) a broad base revenue stream that is not highly dependent on petro-dollar; 2) enhancing private investment and reducing dependence on public investment spending; 3) introducing a specific timeline for the gradual reduction in subsidies; and 4) heightening the social safety net to ease the financial burden of households that is exacerbated by the rising cost of living.

- We anticipate a pre-budget excise duty hike for the sin sector as the government seeks an increase in revenue for 2014. Assuming a 10% increase (or +74 sen) in excise duties for breweries, overall coffers could increase by RM145mil per annum. As for tobacco, a 3 sen increase will probably generate a cumulative revenue of RM435mil. Meanwhile, the price increase of alcoholic beverages and tobacco will not have a significant impact on inflation as this segment contributes a mere 2.2% to the basket of CPI.

- Additionally, the government will introduce two rounds of 1Malaysia People's Aid (BR1M) for 2014. We anticipate an increase in terms of cash handouts to either RM600-700 for households and RM300-350 for individuals during the budget announcement. If the handouts are raised to RM600 and RM300 for households and bachelors respectively, total spending for two rounds of BR1M could potentially amount to RM6.96bil. Assuming that the handouts are RM700 and RM350 for households and individuals respectively, then the overall spending for BR1M could amount to RM8.12bil in 2014. Also, the government will likely extend the eligibility for BR1M to households earning between RM4000 and RM5000 when the subsidy rationalisation policy is implemented.

- Aside from that, we note that public consumption expenditure had soared by 11.1% YoY in 2Q13 (1Q13: +0.1%) owing to the increase in spending for supplies and services. The government could review the expenditure on supplies and services in order to avoid wastages going forward. This segment constitutes a major portion of total operating expenditure. Based on the guidance for 2013 allocation, the government is expected to spend a cumulative RM33.659bil on supplies and services, accounting for 16.7% of total operating expenditure or 16.1% of total revenue for the full year.

- Only weeks away from the tabling of the 2014 Budget, Deputy Finance Minister Datuk Ahmad Maslan tabled a supplementary budget for 2013. The bill seeks an additional RM14.125bil for fiscal year 2013 (or +5.6% from the budget allocation of RM249.7bil). Treasury and Treasury General Services account for the bulk of the allocation, at 88% (or RM12.460bil) of total allocation. However, we expect the overall fiscal position to remain in check provided that the supplementary bill is backed by a stable stream of revenue.

- Savings from the reduction in subsidies this year will be offset by additional spending for the supplementary budget in 2013. Taking the additional spending into consideration, probable increase in revenue and reduction in subsidy bills, our estimate suggests a fiscal shortfall of 4.2% of GDP in 2013 vs. 4.5% in 2012. In comparison, the government is expecting a budget deficit of 4.0% in 2013 before strengthening its fiscal stance to a shortfall of 3% in 2015 and achieving a balanced budget by 2020. In 1H13, the budget deficit stood at 4.1% of GDP. For 2014, the government may project a fiscal deficit of 3.5% as the overall allocation for public expenditure reduces while revenue improves during the course of 2014. Our full-year GDP growth projections are retained at 4.6% for 2013 and 4.8% for 2014.

Source: AmeSecurities