We attended a briefing chaired by 2 members from The Council of Eminent Persons, Tun Daim and Tan Sri Dr Zeti. Increasing purchasing power (B40 focus) and improving governance was emphasised. The GST cancellation will not be evaluated on a piecemeal but as a holistic tax reform. Though still in its early days, developments post GE14 have thus far been encouraging. Should PH deliver on improved governance, Malaysia could emerge as a reform play. Overall, consumer is a winner (GST abolishment) while construction is a loser (project reviews). Maintain FBMKLCI target of 1,880.

Briefing by The Council. Yesterday, we attended a briefing chaired by Tun Daim Zainuddin and Tan Sri Dr Zeti Aziz, 2 of the 5 members from the Council of Eminent Persons. The Council which was formed after Pakatan Harapan (PH) won GE14, was quick to get to work and has already met up with GLC funds and rating agencies to share the new administration’s economic plans and gather feedback.

Increasing purchasing power. The Council emphasised the need to boost purchasing power of the rakyat, especially the B40 segment (monthly income below RM3.5k). Most of the questions on this subject were focused on how the GST would be abolished. The Council shared that the proposed GST cancellation will not be evaluated on a piecemeal basis, but done as a holistic tax reform across the board to achieve its intended objective of raising the rakyat’s purchasing power. A proposal is expected to be out within 100 days (from PH taking power).

Talking deficit. To recap, GST is targeted to contribute RM44bn to government revenue this year. While it is still too early to pinpoint how the GST gap will be filled, The Council shared that some areas include (i) efficiency gains, (ii) reducing wastage and leakages and (iii) project reprioritisation. Recall that PH also proposed to reintroduce the sales tax (RM17bn revenue contribution in 2014). With oil averaging USD69/bbl YTD, we estimate this could add RM5bn to revenue for 2018. While we feel there may be some risk that the 2.8% deficit to GDP target for 2018 may not be met, The Council reassured that attaining a balanced budget is the new administration’s long term objective. On GDP prospects, while there may be upside to private consumption, we also see downside risk to investment activity as projects may be delayed or cancelled. We maintain our 2018 GDP growth forecast at 5.3% for now.

Better governance. The Council mentioned that the GE14 outcome offers Malaysia an opportune time to improve governance, promote accountability and uphold the rule of law. Examples of such proposals include (i) disallowing politicians from being involved in GLCs, (ii) smaller Cabinet size and (iii) investigating 1MDB in accordance to the law. This improved governance, if delivered, could add points to Malaysia’s sovereign rating.

Market implications. The broader market performance post GE14 was certainly a positive surprise with the FBMKLCI sustaining instead of a short term sell down as most had envisaged. We believe this was due to (i) smooth power transition post GE14, (ii) speedy naming of 3 key ministerial positions and (iii) establishment of The Council with credible figures. Should PH deliver on its promise on improved governance, it is not hard to see Malaysia emerge as a reform play. Sector wise, the abolishment of GST should benefit consumer, which as it is, is already witnessing improving indicators. We view construction as a likely loser from the review of mega projects which may include the ECRL (RM55bn), HSR (RM60bn) and MRT3 (RM40bn). These reviews could lead to delays or in the worst case, outright cancellation. In any case, we expect contract flows to remain weak for the remainder of 2018 and are putting our sector rating under review with a negative bias. We maintain our FBMKLCI target of 1,880 premised on 16.5x 2018 earnings.

Source: Hong Leong Investment Bank Research - 16 May 2018