• A cheer for Islamic securities

• A bane following SST re-imposition for brokerage business

• Lack of clarity on SRI, a concern

• An increase in SST to 8% could hurt private consumption activity

• FBMKLCI remains driven by external factors

• Our FBMKLCI year-end target of 1,550-points stays.

Fiscal Budget 2024: Analysis

There was a lot of hope for Fiscal Budget 2024 but the government kept its key strategy until next year particularly the Subsidy Rationalisation (SRI) initiative amid the details which can be described as scarce, if any. One thing for sure, the government remains firmed on its commitment to make the wealthy pay for more and channel the savings to the needy. Various details were a surprise particularly the 2023 GDP target which has been lowered to 4.0%, at the lower end of the government’s projection (4.0%-5.0%). The sharp slowdown in global demand particularly for manufacturing goods were especially hard, which reflected in lackluster Manufacturing PMI numbers which remained below the neutral level since September last year. It moderated further to 46.8 in September, a new low since January 2023. The hike in SST to 8.0% from 6.0% was unexpected and this could hurt private consumption activity, one of Malaysia’s engine of growths. The much-anticipated announcement on consumption tax re-implementation was also a non-starter. The push forward of Visit Malaysia Year (VMY) by one year to 2026 from 2025 before was also a surprise amid the sector’s readiness that could be an issue.

The higher SST rate, among others, will be applicable to logistic services, brokerage, underwriting and karaoke services though will not include F&B and telecommunication services. Of note, during the GST implementation in 2015, brokerage business was also slapped with GST but was removed after the change in government, only to be re-implemented but at a higher rate in 2024. Nonetheless, this could be easily absorbed should FBMKLCI able to rebound and hence, easily cover a 2-pps rise in brokerage services to 8.0%. Based on mix of positives and negatives, we foresee a short-term knee-jerk reaction on Monday at the opening bell though we think the market will be more concern on the development in US particularly its inflation condition which emerged unchanged in September against August (announced on 12th October; 3.7%). This is 170 basis points higher than the US FOMC comfort level (note: circa 2.0%). Even the sizeable 500 bps adjustment in US’s FFR since May 2022 failed to dent inflation - a cause for concern.

The jump in US’s JOLTS in September to 9.6mn against 8.8mn in August (+9.0% MoM) is also another factor that could dampen sentiment. This is almost 1-fold higher against the pre-COVID 19 average of 5mn (2009-2019) These developments could push the US Federal Reserve to remain ‘hawkish’ and therefore, the likelihood of another 1 or 2 FFR adjustments in the near term. Of note, there are two more FFR announcements in 2023 - in October/November and December. Downside risks to Ringgit remains as a result

Below are several salient points on Fiscal Budget 2024:

• Expansionary 2024 Fiscal Budget following a 2% increase in allocation to RM393.8bn (an increase of RM5.8bn against 2023).

• A smaller development expenditure (DE) of RM96.5bn in 2024 versus RM90.1bn in 2023

• Fiscal debt to rise to 63.5% of GDP in 2024, below the ceiling which was raised to 65% previously.

• 2024 fiscal deficit forecast of 4.3% of GDP vs. 5% in 2023. This is expected to drop further to 3.5% by 2025.

• Medium term oil price projection of USD80 per barrel (YTD 2023: USD82 per barrel).

• A 2024 GDP target between 4.0%-5.0% amid expansion in all sectors and better prospects in global trade.

• VMY has been pushed to 2026 with an expected tourist arrival of 26.1mn and tourism receipt of RM97.6bn (circa 6% of GDP).

• The implementation of capital gains tax (CGT) for the disposal of unlisted shares by local companies based on the net profit at a rate of 10% from March 1, 2024.

• The government is considering the exemption of CGT on the disposal of shares related to certain activities such as approved initial public offering (IPO), internal restructuring and venture capital companies subject to specified conditions.

• The government plans to implement the global minimum tax (GMT) in 2025 for applicable to companies with a global revenue of at least 750mn euro (>RM3.7bn). Of note, Malaysia has basically agreed to implement a GMT of 15% on some MNCs and is among the 136 countries announced by the OECD previously as countries that are ready to reform the international taxation system. Singapore will also implement GMT at the same rate in 2025. Indonesia and Vietnam will also follow suit.

Despite several less-than-sanguine factors, there were pockets of cheer including for Islamic Securities following the tax exemptions for income from Islamic Securities Selling and Buying (ISSB). This will be a boost for over 900 fully shariah counters in Bursa Malaysia. There was also a sigh of relief amid the government’s fiscal deficit that will be trending lower since a high of above 6.0% during the COVID-19 pandemic. The plan to rationalize subsidy will also cheer investors amid Malaysia that will finally able to correct the distortion on subsidy and restore its fiscal position. PMX was also bold when he mentioned about the untenable subsidy for petrol and this is a sign that it will be among the first to be corrected. Petrol subsidy usually makes up 40% of government subsidy spending and its volatility could poke a hole in government coffers especially if oil price spike during shock period (i.e., geopolitical tension). The weakness in Ringgit is another major factor amid the government that needs to pay more for a barrel of oil. Lack of clarity on the SRI targeted goods, implementation and timeline is disconcerting however though understandable given the readiness of the Central Database Hub or ‘PADU’ only in January 2024.

We predict the implementation of SRI in 2H24 given the 2024 Hari Raya that will fall in early April. We also don’t expect an announcement prior to April for that matter. The government’s bullish projection of CPO price of between RM4k-4.5k per tonne for 2024 is also a concern given the sizeable gap against our forecast of RM3.6k per tonne (YTD 2023 CPO: RM3,847 per tonne). Demand risks remain a factor amid China’s moderating GDP growth next year (GDP 2024F: 4.5%; 2023F: 5.0%) and sizeable global soybean supply and hence, demand for CPO. Note that 40% of our CPO shipment go to 3 major countries namely China, India and Pakistan. These factors, in our view, could dampen the CPO price. Note that agriculture sector contributes circa 5% to GDP.

Above all, external factors remain significant on equity sentiment especially the policy development in US. The yet-to-conclude US interest rate upcycle remains the biggest speed bump no thanks to strong US labour market condition and consequently, inflation (economics theory of Phillip Curve in play). Both indicators for September remain off compared to US FOMC expectation, pushing us to predict another 1-2 FFR tightening measures ahead. The FFR should reach its new higher terminal rate by 4Q23 or 1Q24.

Then what will drive the market in 2023? Sentiment is expected to rebound once the US FOMC signals the end of its tightening cycle. This should be a precursor for normalization in US FFR. Note that the current FFR of 5.50% (to be 5.75%-6.0% soon) is 200 basis points higher against its neutral rate of 4.0%. If not normalized, the elevated level of FFR could hurt US economic growth which could be skirting recession in 2024 (US 2024 GDP: 1.0%; 2023E: 2.1%). 76 economists predict a 55% probability of US facing a recession in 2024. On that score, we predict a cut in US FFR by 3Q24 (between July-September) just in time for US Presidential election period (note: November 2024). In any case, investors are pricing in the prospect of a cut in FFR in 2024 which has been the driving factor in the return of foreign investors into our bourse. Though tempered by intermittent selling pressure due to negative external development but 3Q23 net buy by foreign investors have been very encouraging after rising to RM2.2bn versus a net sell of -RM1.8bn and -RM2.3bn in 1Q23 and 2Q23 respectively. We expect foreign investors to be consistent on this leading into 2024 to be powered by the attractively valued FBMKLCI (table 1) and undervalued Ringgit. By our measure, Ringgit that is seen to be 10-20% below its value. Our FBMKLCI 2023 year-end target of 1,550 remains unchanged.

Source: BIMB Securities Research - 16 Oct 2023