Highlights

• We expect 2016 Budget to be based on 11MP strategies with additional measures to safeguard economic growth in meeting the current global and domestic challenges.
• A mildly expansionary budget based on modest assumptions (GDP growth 4-5%, fiscal deficit 3% of GDP). Expect government to announce progress of GST collection and review of minimum wage policy.
• Expect GDP growth target of 4.0-5.0% for 2016, largely supported by private sector expenditure amid weak external demand. Sectoral measures to chiefly focus on the services and construction sectors, in line with ETP broad objective.
• Benign inflation outlook of 2.0-3.0% as lapse of GST effect and subdued outlook for oil prices offset impact of imported inflation due to weak MYR.
• Reduction in fiscal deficit target to 3.0% as decent GST collection offsets lower oil-related revenue.
• Further OE cut but DE to be sustained to uphold growth momentum.
• Measures to tackle rising living costs (RM100 increase in BR1M, RM100 increase in minimum wage, optional 2% cut in employees’ EPF contribution rate, etc.) continue to take center stage, which will raise household disposable income by RM5.3bn in 2016.

Impact

• Neutral to overall market as reduction in fiscal deficit target is widely expected and unlikely to mitigate the internal and external uncertainties impacting sentiment. Moreover, the focus is likely on reducing costs of living.
• That said, potential winner is the Consumer sector, especially when it had already suffered from post GST and low consumer sentiment for a good six months. The RM5.3bn additional disposable income in 2016 could revive consumer sentiment and help sustain demand, albeit benefiting staple rather than durable goods.
• New minimum wage unlikely to significantly impact margin as most are already above the potential new floor coupled with various mitigating strategies.
• Construction the other sector in position to benefit from implementations and sustained high DE. However, most projects are not new and priced in. Thus, expect catalyst for the sector would be actual contract awards in 2016.
• Healthcare could also benefit mainly pharmaceutical players but mixed for private healthcare providers.
• Unlikely to see “Sin” tax hike as they have become off budget issues, already had indirect hike and still feeling from absorption of GST.

Source: Hong Leong Investment Bank Research - 1 Oct 2015