The government has announced further details to support consumption (stabilise RON95 and diesel, 50% discount on toll prices prior to Hari Raya), cap further increase in public debt (HSR, MRT3) and narrow the fiscal gap (introduction of SST in September 2018). We maintain the overall GDP forecast of +5.3% in 2018, as the upside to private consumption is expected to be offset by investment uncertainty. On fiscal deficit, we feel the government will continue to reduce excessive expenditures and increase revenue to meet the fiscal deficit of -2.8% of GDP in 2018.

Supportive of consumption. The Government has decided to maintain RON95 petrol prices and diesel prices while allowing RON97 petrol prices to float according to market forces. Toll prices will also be discounted by 50% for two days prior to Hari Raya celebrations. While GST will be ‘zerorised’ in June 2018, the SST will only come into effect in September 2018, presumably after it goes through the Parliament process. This is expected to boost consumption slightly in 3Q 2018, as we expect consumers to take advantage of the temporary absence of consumption tax, especially on big-ticket items. On the fiscal front, the GST loss of RM22bn may be compensated by the following:

1. Gain in SST revenue of RM7.5-RM10 bn in September - December 2018 (HLIB assumption of RM22.6bn – Tun Daim’s estimate of RM30bn for the year).
2. Higher oil-related revenue of RM5.4bn due to the increased global oil price of USD70/pb (MOF budget: USD52/pb) and higher PETRONAS dividend payment, potentially up to RM9bn.
3. Approximately RM1.6bn in savings from dissolution of several agencies (e.g. Land Public Transport Commission (SPAD), National Council of Professors (MPN), Special Affairs Department (JASA)).

This is estimated to bring total revenue/savings of RM23.5bn. We opine that the government will continue to look at other revenue measures (e.g. higher dividend payment from Khazanah, Bank Negara Malaysia, and increase base of SST) or lower expenditure plans to reach the fiscal deficit target of -2.8% of GDP.

Scrapping investment projects. To recap, the Council of Eminent Persons proposed to review and reprioritise the mega-infrastructure projects as a means to reduce the overall public debt. Following this, the Government has decided to cancel the HSR (estimated at RM110bn) and MRT3 (RM40bn) that were slated to take off from 2019. This is anticipated to put a cap on the government guarantees. On the ECRL, the government said it was still under review as the project is said to have a completion rate of 14%. The cancellation of mega-infrastructure government projects and continued uncertainty in other investments are expected to impact financial markets in the short-term. On the overall GDP prospects in 2018, while there may be upside to private consumption, we also see downside risk to investment activity as projects may be delayed. We maintain our 2018 GDP growth forecast at 5.3% for now.

Source: Hong Leong Investment Bank Research - 31 May 2018