Background

Since the start of Fed tapering in mid-Dec 2013, the market has shifted its focus predominantly on growth outlook. For some emerging economies, macro risks have diminished as measures undertaken to improve fiscal position as well as higher commodity prices (i.e. CPO) have contributed to credible fiscal consolidation path and more favourable balance of payments.

In this regard, Malaysia has also demonstrated similar trait. Current account surplus picked up significantly to RM19.8bn in 1Q14 from a low of RM1.8bn in 2Q13, driven mainly by higher CPO export prices amid efforts to re-schedule projects with high import content.

At the same time, Malaysia’s government has achieved some milestones in subsidy rationalization (i.e. 20 sen fuel price hike in Sep-13, 34 sen sugar price hike in Oct- 13, 15% electricity tariff hike in Jan-14 & 20% industrial gas price hike in May-14). Coupled with the upcoming 6% GST in Apr-15, the fiscal deficit reduction plan has been credible from the foreign investors’ point of view.

Despite the more solid fundamentals, we believe focus of the market may again shift to a potential resurgence of macro risks for Malaysia.

Insights

There are several indicators that point to lower current account surplus in the near future:

i. Lower CPO price. CPO export price has trended lower to RM2,403/tonne as at 12/06/14 albeit marginally higher than 2013 average of RM2,377/tonne. Given 26m tonnes of oil palm exports in 2013, a decline of RM100/tonne in CPO export price will trim RM2.6bn from the annual trade surplus.

ii. High consumption & capital imports. Consumer spending has proven to be resilient from 1Q14 GDP data. Imports of consumption goods (US$) continued to rise despite weaker MYR. Capital imports are expected to surge in 2H14 as Rapid project gathers pace while overall ETP maintains its momentum.

Headwinds on Malaysia’s fiscal sustainability appear to have intensified lately:

i. Fuel subsidy. There is an urgent need to plug the hole of existing fuel subsidy. We estimate that any delay in fuel subsidy revamp will cost the government additional ~RM2-3bn per annum. Meanwhile, a total curb of fuel smuggling activities can save ~RM7bn per annum (fuel subsidy in 2013: RM28.9bn).

ii. Contingent liabilities. We expect the market to continue scrutinize contingent liabilities of various government-linked companies (i.e. 1MDB).

iii. Supplementary budget. The recent supplementary budget of RM4.1bn (RM2.1bn for emoluments) shows that the government needs better control of its finances (operating expenditure which is recurring).

The potential resurgence of macro risks may be shortterm negative for the stock market. On growth outlook, we maintain our full-year 2014 GDP forecast at 5.5%. Sequentially, we still expect quarterly yoy GDP growth to taper off due to higher base and fading of export boost.

Source: Hong Leong Investment Bank Research - 16 Jun 2014