Our 2021 GDP forecast of 6.5% sits at the lower end of MOF’s range of 6.5% to 7.5%. MOF’s 2021 deficit target of -5.4% came in within our expected range of - 5.0% to -5.5% which we reckon is achievable. Budget 2021 targets those that have been the most vulnerable to the negative ramifications of Covid-19 (i.e. B40, M40 and SMEs) with a focus on aiding disposable income, preserving employment and business continuity. We believe the market will read Budget 2021 with a positive bias as it provides Malaysia with the much needed counter cyclical booster. Sectorial impact seems positive (construction, property, gloves, healthcare, tourism, logistics) to neutrally tilted (banks, telco). Maintain KLCI target at 1,580 (17.8x PE on CY21 EPS).

GDP rebound of 6.5%-7.5% for 2021 (point estimate: +6.9% YoY; 2020e: -4.5% YoY). MOF projects a broad-based recovery across all sectors. On the supply side, construction sector is anticipated to record the strongest growth, driven by the acceleration of existing and new major infrastructure projects. On the demand front, growth will be underpinned by domestic demand and higher net exports. MOF projects private consumption to grow by +7.1% YoY (2020e: -0.7% YoY), underpinned by improvements in labour market conditions (unemployment rate 2021f: 3.5%; 2020e: 4.2%) and favourable financing conditions. Inflation is expected to normalise to 2.5% YoY (2020e: -1.0% YoY) from low base effect and higher crude oil prices (2021 oil price assumption: USD42/b; 2020e: USD40/b). As economic activities resume, this will likely lead to higher repatriation of profits and remittances by foreign workers, resulting in wider deficits in the primary and secondary income account. In addition, the resumption of infra projects is also anticipated to drive capital imports higher. With this, CA surplus is expected to moderate further to RM20.3bn or 1.3% of GNI (2020: RM48.5bn or 3.4% of GNI). Despite stronger growth projections for 2021, MOF said downside risks to growth remain, emanating from resurgence of Covid-19 cases and the duration of global and domestic containment measures. Our 2021 GDP forecast sits at the lowest end of MOF’s projection of +6.5% YoY.

MOF headline deficit of -5.4% of GDP for 2021, within our expectation of -5.0% to -5.5% of GDP (2020e: -6.0% of GDP). As economy remains on a fragile recovery path, government is expected to increase its total expenditure by 2.5% YoY to RM322.5bn in 2021 (2020e: RM314.7bn). Out of this total, RM236.5bn (73.3%) will be channelled to OE, RM69.0bn (21.4%) to DE and the remaining RM17bn (5.3%) to Covid-19 Fund. Based on ministries, Ministry of Education, Ministry of Finance, Ministry of Health remain the top three recipients of funds for 2021, similar to 2020. This will be financed by higher revenue collection (RM236.9bn; 2020e: RM227.3bn), supported by higher economic growth, business prospects and better tax revenue collection. However, Covid-19 infections continue to rise at home and abroad, which could impede economic recovery, posing downside risk to revenue collection. Nevertheless, we opine the fiscal deficit of -5.4% of GDP is attainable as government can adjust its pace of spending accordingly. The government is also allocating RM2bn contingency reserves, not currently included in the current calculation.

Higher development expenditure to support economic growth. Based on Medium-Term Fiscal Framework 2021-2023, the average development expenditure spending is budgeted at RM70.8bn/year. In 2021, a sum of RM69.0bn has been allocated, a strong increase of +38% YoY (2019: RM50.0bn). The largest share will be directed towards the economics sector (56.4% of total DE), focusing primarily on transport (RM15bn) and energy & public utility (RM3.3bn). In addition, 26.7% of total DE will be apportioned to social sector. Under this category, education (RM8.9bn) and healthcare (RM4.7bn) will receive the largest increase through development and construction of buildings as well as procurement of medical vehicles and equipment.

Higher operating expenditure, focused on debt service charges and supplies & services. OE is also expected to increase (RM236.5bn; 2020: RM226.7bn) with the largest increase directed to debt service charges (RM39.0bn; 2020e: RM34.9bn) and supplies & services (RM32.8bn; 2020e: RM30.1bn). Under supplies & services, MOH and MOE are expected to receive 45.2% of total allocation for the procurement of medical supplies, as well as repairs and maintenance of medical and school facilities. Meanwhile, subsidies & social assistance is expected to fall due to consolidation of cash assistance programmes under BSH and BPN.

Establishment of Covid-19 Fund from 2020 to end-2022. The Covid-19 Fund is introduced to facilitate a structured monitoring and transparent reporting process of the programmes announced under the economic stimulus packages. Since the beginning of Covid-19, a total of RM45bn of direct fiscal injection has been allocated under the Fund (PRE: RM3.2bn; PRIHATIN: RM21.8bn; PRIHATIN SME+: RM10bn; PENJANA: RM10bn) with an additional RM10bn for the expansion of existing programmes. Of the total allocation, RM38bn will be disbursed in 2020 while the remaining RM17bn is expected to be spent in 2021 on wage subsidy, small-scale infrastructure projects, SME soft loans and food security. The creation of a specific fund to finance economic stimulus packages also allows for operating balance to remain in positive territory.

Higher revenue growth, driven by rebound in economic activity. MOF expects stronger tax revenue collection, mainly contributed by higher corporate, petroleum and individual income taxes amid improving economic activity, better earnings expectations, alongside improved tax compliance. Government is also projecting higher indirect tax due to increased SST collection (RM27.9bn; 2020e: RM24.5bn), in line with improved consumption spending. However, non-tax revenue is expected to fall following lower dividends from PETRONAS (RM18.0bn; 2020e: RM34.0bn) and Khazanah (RM1.0bn; 2020: RM2.0bn). In addition, Government will receive special payment from KWAP amounting to RM5bn to partly finance its retirement charges, the second consecutive year it is doing so. Despite the rebound in total revenue to RM236.9bn, it still remains below 2019 levels reflecting lower oil prices.

Statutory debt limit temporarily increased from 55% to 60% of GDP. Parliament passed the Temporary Measures for Government Financing 2020 Act on 21st September 2020 which will be effective until December 2022. Under this Act, the statutory limit of Federal Government debt (MGS, MGII, MITB) is increased to 60% of GDP from 55% of GDP. As at end-Sep 2020, statutory debt (MGS, MGII, MITB) stood at RM820.9bn (57.0% of GDP; 2019: RM737.4bn or 48.8% of GDP), within the new statutory limits. Meanwhile total public debt rose to RM874.3bn; 60.7% of GDP (2019: RM793.0bn; 52.5% of GDP).

Government remains committed to medium-term fiscal consolidation under the 2021-2023 Medium-Term Fiscal Framework. While the government has to balance the needs to support the recovery phase in the short run, it is also committed to uphold its fiscal reform agenda and resume its fiscal consolidation efforts in the medium-term. Over 2021-2023, fiscal deficit is targeted to average 4.5% of GDP. In doing so, the government has given broad spending guidance to ministries to ensure appropriate allocation and fiscal discipline. On the revenue front, MOF will enhance its revenue by exploring new sources, widening the revenue base, improving tax administration to reach an average of RM243.7bn/year (2021f: RM236.9bn) with the share of non-petroleum revenue to increase to 83.4% (2021f: 84%).

Consumption and investment support. 2021 Budget is essentially a budget intended to facilitate the recovery, as it focuses on the high-multiplier impact construction sector (e.g. mega infra projects such as MRT3 and Pan Borneo- Sabah) and provides assistance to the vulnerable segment (unemployed and lower-income segments). On consumption, measures were undertaken to maintain support through cash handouts, lower EPF contribution, targeted loan moratorium and tax incentives which would lead to higher disposable income:

• RM6.5bn: Under Budget 2021, government will continue to implement cash assistance in the form of Bantuan Prihatin Rakyat (BPR), formerly known as Bantuan Sara Hidup (BSH) benefitting 8.1 million recipients (previous allocation: RM5bn benefitting 4.3mn beneficiaries).
• Eligible borrowers who are BPR recipients and micro enterprises with loans up to RM150k can undertake a loan moratorium for 3 months or reduce their monthly payment by 50% for 6 months. For M40 borrowers, they only need to declare their reduction in income to secure repayment assistance.
• RM9.3bn: Reduce employee contribution rate from 11% to 9% from January 2021 for 12 months.
• RM4.0bn: Ability for the unemployed to withdraw RM500/month with a total of up to RM6k over 12 months from EPF Account 1.

While labour market conditions have showed some improvement, the momentum of recovery has slowed as unemployment rate remained at 4.7% in August, below the pre-pandemic level of 3.3%. Hence, government’s initiatives are also focused on the unemployed:

• RM3.7bn: Government will implement Skim Jaminan Penjanaan Pekerjaan (JanaKerja) which will provide 500k new job opportunities including skills development and retraining programmes
• RM2.0bn: Continuation of hiring incentive programme under SOCSO (PenjanaKerjaya) with enhancements.
• RM1.5bn: Extension of wage subsidy for tourism industry at a rate of RM600/month for workers earning RM4k and below for another 3 months. The limit of employees per application increased to 500 from 200 pax.
• RM0.15bn: Job Search Allowance extended for 3 months where the unemployed will get 80% in the first month, 50% for second until sixth month and 30% for last 3 months.

Much needed booster. We believe the market will read Budget 2021 with a positive bias as it provides Malaysia with the much needed counter cyclical booster to combat the headwinds brought about by Covid-19. Unsurprisingly, quite a number of measures under Budget 2021 were an extension/ higher allocation/ improvement from the previously announced PRIHATIN and PENJANA stimulus initiatives. In a nutshell, Budget 2021 seems to target those that have been the most vulnerable to the negative ramifications of Covid-19 (i.e. B40, M40 and SMEs) with a focus on aiding disposable income, preserving employment and business continuity.

From a “listed sectorial” perspective, implications from Budget 2021 appear to be slightly-positive to neutrally tilted.

• Construction: We sense a revival of news flow with (i) higher DE by 38% YoY, (ii) implementation of MRT3 (RM22bn), HSR (RM60bn) and RTS (RM4bn) and (iii) continuation of Kwasa D’sara, PBH, KVDT1 and Southern Double Track.
• Property: Stamp duty exemption for first home buyers on houses up to RM500k; however the ongoing HOC (ends May 2021) is already providing this exemption (up to RM1m of the prop price).
• Gloves: To help combat Covid-19, the big-4 will donate RM400m. We read this in positive light given (i) it augurs well for ESG efforts and (ii) this gesture of goodwill should assuage investors’ concerns on a windfall tax. Estimated FY21 earnings impact (net of tax) is at a manageable range of 2.5-5.3%.
• Healthcare: Pharmaniaga’s logistics may benefit from higher allocation to MOH, additional RM1bn to combat Covid-19 while its fill-n-finish vaccine segment should benefit from the COVAX program and pneumococcal vaccine. Several medical related individual tax reliefs may encourage substitution to private hospitals (KPJ and IHH).
• Tourism related: Extended for another 3 months at RM600/month for workers earning RM4k and below. Limit of 200 employees per application will be increased to 500 employees. This targets specifically the tourism sector; will help aviation and hotels.
• Logistics: RM150m to implement the Shop Malaysia Online initiative together with the e-commerce platform to encourage online spending. This will further boost courier services (logistics) which is already benefiting from the substitution to online shopping amid Covid-19.
• Banks: Targeted Repayment Assistance (TRA) to individual B40 borrowers and microbusinesses with loans up to RM150k. Minimal impact to banks as it is not made available to all individuals and SMEs. We believe any MFRS 9-related day 1 modification loss stemming from this move will be largely offset by unwinding of modification gains from the 1st automatic loan moratorium. We note that B40s account for c.38% of household debt, of which c.30% are auto loans and overall, comprise 7% of system lending.
• Telco: 8m B40 individuals will be eligible to receive telco credit worth RM180 (RM1.5bn allocation). While this may lift subscriber base and ARPU, it will likely be neutralised by the requirement for telcos to match the RM1.5bn government allocation in the form of free data quota.

Maintain KLCI target at 1,580. We maintain our KLCI target at 1,580 (17.8x PE on CY21 EPS). Market weakness in the last 3 months has made valuations more palatable: (i) PE slightly above LT mean, (ii) earnings yield spread to MGS10 yield at mean and (iii) trailing P/B at -1.5SD. Foreign shareholding (Sept: 20.9%) has also retraced close to the GFC low (20.7%).

Source: Hong Leong Investment Bank Research - 16 Nov 2020