• Budget 2022 is expansionary – no surprise here. Coming of serious Covid-19 infections that stalled part of the economy in 2021, Malaysia is projected to expand with growth between 5.5% and 6.5% in 2022, according to MOF. This is in tandem with the anticipated reopening of economies, normalisation in economic activities, better consumer sentiment, and business confidence. For 2021 GDP growth is expected at 3.0-4.0% versus -5.6% in 2020.

• Budget 2022 is the largest ever. The Budget 2022 will see an expansion in revenue to RM233bn aided by a higher tax collection, including a one-time windfall tax for companies earning above RM100m. The resulting operating expenditure will see a rise by a substantial 6.3% yoy to with net increase of 23% in development expenditure (DE) to RM75bn, making the infrastructure sector as a major beneficiary as in previous years, while another RM32.4bn is set aside for MoH. The continuation of mega projects, such as MRT2, LRT3, RTS and Pan Borneo Highway as well as new projects such as MRT3 and upgrading of Klang Valley Double Track Phase 2, will contribute to the higher DE but the construction sector lacks fresh projects to excite investors, in our view.

• Pent-up demand continues as 2021 is a watershed year. The expansion in 2020’s GDP is estimated to be derived from higher private consumption (+7.3% yoy) and public investment (+24.1% yoy). Demand will also be driven by better job prospects, as the unemployment rate is projected to fall to 4.0% in 2022, compared with an estimated 4.6-4.8% in 2021. Continued aid to key sectors including a total of about RM1,000 to civil servants and pensioners could aid in consumer spending. Despite the spending, inflation is expected to moderate to 2.1% - slightly optimistic scenario in our view.

• Vaccine rate is game-changer, but KLCI sees marginal upside. With the country’s adult vaccination rate at more than 95% and well above most ASEAN countries, Malaysia will be coming from a position of strength to fully re-open its economy at a much faster pace. We remain steadfast in our commodity-related and re-opening themes (including consumers and industrials) which we introduced since 4Q20. However, the one-off tax of 33% for 2022 versus 24% currently will hit the aggregate earnings of the KLCI and HS Index quite significantly. We will reduce our aggregate earnings for both indices in due course, but maintain our KLCI target of 1,650 for the year.

Source: BIMB Securities Research - 29 Oct 2021