We concur with the government’s projection that 2022 GDP will be supported at 5.5-6.5% (our preliminary estimate at 5.8%). MOF’s 2022 deficit target of -6.0% is broadly realistic but marks a more gradual pace of fiscal consolidation – understandable given the need for an expansionary stance for economic revival. Overall, Budget 2022 accords the much needed aid to those severely hit by the pandemic (higher cash handouts under BKM, wage subsidy, etc.). However, implementation of the “Makmur Tax” presents a one-off earnings hit to the upper tier of corporate Malaysia while changes in the stamp duty structure may dent near term investor participation in the market. We flag downside risk to our end-2021 KLCI target of 1,640 (16.7x PE on mid-CY22 EPS).

ECONOMIC VIEW

Higher GDP growth of 5.5%-6.5% for 2022, with point estimate of 6.0% (2021e: 3.0%-4.0%; point estimate: 3.5%). We concur with government’s projection that GDP growth will be supported at 5.5-6.5% (our preliminary estimate is at 5.8%), with assumption of economic activity resumption following a high nationwide vaccination rate (27 Oct: 74% of total population double vaccinated). On the supply side, MOF projected an expansion across all sectors, excluding mining, due to scheduled shutdowns of oil & gas plants for maintenance. This was also seen in 2018, 2019 and 2020 when the sector contracted by -2.2%, -0.6% and -10.6% respectively. In 2022, the construction sector is anticipated to record the strongest growth, driven by the continuation and acceleration of major infrastructure projects in the civil engineering space, as well as the government’s measures in place to spur housing demand in the residential space. On the demand front, growth will be underpinned by domestic demand and higher net exports. Private consumption is projected to expand by +7.3% YoY (2021e: +4.1% YoY), slightly higher than 10-year average (2010-2019) of 7.1% YoY supported by improved income and employment prospects (unemployment rate 2022f: 4.0%; 2021e: 4.6%-4.8%). Inflation is expected to moderate to 2.1% YoY (2021e: 2.4% YoY) as crude oil prices stabilise (2022 oil price assumption: USD66/b; 2021e: USD68/b; ytd: USD68.36). With the resumption of ongoing investment activities, higher repatriation of profits and compensation for foreign professionals are likely to result in wider primary account deficit, partly offsetting the wider expansion in goods balance. Consequently, CA surplus is expected to moderate to RM55.6bn or 3.5% of GNI (2021e: RM56.7bn or 3.8% of GNI). While growth prospects are brighter for 2022, MOF still cautioned on downside risks stemming from a prolonged outbreak with new variants of concern, volatility in global financial markets and commodity supply shocks.

MOF headline deficit of -6.0% of GDP for 2022, is broadly realistic (2021e: -6.5% of GDP). In absolute terms, fiscal deficit was slightly lower at RM97.5bn (2021e: RM98.8bn), but still higher than 2019 pre-pandemic levels of RM51.5bn, underscoring government’s expansionary fiscal stance to expedite economic recovery. Total expenditure is projected to record the highest level of spending of RM332.1bn in 2022 (2021e: RM320.6bn), of which RM233.5bn (70.3%) will be channelled to OE, RM75.6bn (22.8%) to DE and RM23bn (6.9%) to Covid-19 Fund. Based on ministries, Ministry of Education (RM52.6bn), Ministry of Health (RM32.4bn) and Ministry of Finance remain the top three recipients of funds for 2022, similar to 2021. The higher expenditure bill will be financed by higher revenue collection (RM234.0bn; 2021e: RM221.0bn), in line with improved economic prospects and better tax collection. The government is also allocating RM2.0bn contingency reserves, similar to last year’s Budget, which is not included in the current calculation. The government has reiterated its commitment to ensure adequate fiscal support to the economy. Hence, they expect the pace of fiscal consolidation to be more gradual than initially expected, as guided by the medium-term fiscal framework and targets under the 12MP.

Higher development expenditure to support economic growth. Based on the Medium-Term Fiscal Framework 2022-2024, the average development expenditure spending is budgeted at RM83.3bn/year. For 2022, RM75.6bn has been allocated, a +21.9% YoY increase from the previous year (2021e: RM62.0bn). Out of the total funds, 88.4% will be used for ongoing projects and the remainder for 1,180 new projects. The economic sector will get the lion’s share, however lower than last year (53.2%; 2021e: 54.5%), primarily on transport (RM15.5bn), namely Electrified Double Track Gemas-Johor Bahru, Rapid-Transit System Link and Pan Borneo Highway. Energy & public utility will receive RM3.2bn, while the social sector’s share is expected to increase (30.0%; 2021e: 28.0%). Under this category, education (RM12.0bn) and healthcare (RM4.5bn) continues to receive the highest allocation for research grants, TVETS and construction of schools as well to improve the healthcare system and procurement of medical vehicles and equipment.

Higher operating expenditure, focused on supplies & services and debt service charges. OE is also expected to increase (RM233.5bn; 2021e: RM219.6bn) with the largest increase arising from supplies & services (RM30.4bn; 2021e: RM23.3bn) and debt service charges (RM43.1bn; 2021e: RM39.0bn). As a result, debt service charges as percentage of revenue is anticipated to rise to 18.4% (2021e: 17.6%), higher than the guideline of 15%. Allocation for supplies & services will be mostly directed to Ministry of Health (33.1%), Ministry of Home Affairs (12.5%) and Ministry of Education (11.2%) for higher spending on medical supplies and professional services. Meanwhile, subsidies & social assistance is also expected to rise, albeit only slightly (RM17.4bn; 2021e: RM16.7bn) on higher allocation for social assistance. Following the recent rapid increase in commodity prices, we see the risk of government increasing the spending further on subsidies & social assistance to mitigate the negative impact of higher prices on consumer’s cost of living.

Lower Covid-19 Fund allocation in 2022. Having almost reached the initial RM45.0bn cap on spending under the fund in 2020 (RM38.0bn), the fund’s ceiling was subsequently raised to RM65.0bn in 2020 and finally to RM110.0bn to accommodate the additional spending on assistance programmes announced in 2021 (e.g., Bantuan Prihatin Rakyat, Wage Subsidy). In line with this, total allocation for 2021 was revised up to RM39.0bn, while a smaller sum of RM23.0bn is budgeted for 2022, mostly for assistance programmes which will be extended from the previous year. As this is the final year for the Covid-19 Fund, total spending under this fund is estimated at RM100.0bn, leaving an RM10.0bn buffer for contingencies.

Higher revenue growth, driven by expansion in economic activity. Total revenue growth is projected at +5.9% YoY (2021e: -1.8% YoY) to reach RM234.0bn, below 2019 pre-pandemic levels of RM264.4bn. In 2022, MOF expects stronger direct tax revenue collection (RM127.3bn; 2021e: RM120.0bn), mainly driven by higher corporate, individual and petroleum income taxes amid high vaccination rate, better economic prospects and improved tax compliance. Indirect tax collection (RM44.0bn; 2021e: RM41.8bn) is anticipated to improve as well, contributed by rise in excise duties and slightly higher SST collection of RM27.6bn (2021e: RM26.5bn; original target: RM27.9bn) as consumer and business sentiments improve. Meanwhile, nontax revenue is also expected to improve following increase in investment income. PETRONAS is expected to deliver steady dividends (RM25.0bn; 2021e: RM25bn; original: 18.0bn) while KWAP will continue to contribute RM5.0bn (2021e: RM5.0bn) to partly finance retirement charges, the third consecutive year they are doing so. BNM is anticipated to pay RM5.0bn in dividends, slightly higher than RM4.0bn allocated in 2021. While revenue estimates were conservative due to expectation of lower Brent oil price assumption of USD66/pb in 2022, the upside of revenue input could be offset by higher outlay in government’s subsidies and social spending.

Statutory debt limit raised from 60% to 65% of GDP. Parliament approved the increase of statutory debt ceiling from 60% to 65% of GDP, effective until Dec 2022. As at end-Jun 2021, statutory debt (MGS, MGII, MITB) stood at RM890.7bn or 58.8% of GDP, within the new statutory limits (2020: RM827.2bn or 58.4% of GDP). Meanwhile total public debt rose to RM958.4bn or 63.3% of GDP (2020: RM879.6bn; 62.1% of GDP). MOF expects total public debt to reach 66.0% of GDP while statutory debt to be at 63.4% of GDP by end-2022, within the threshold.

Consumption and investment support. Budget 2022 aims at safeguarding economic growth in a prudent manner within the constraint of a tight fiscal resources. Most of the existing measures are increased and expanded to enhance their coverage and effectiveness. On consumption, measures were undertaken to maintain targeted support through cash handouts, lower EPF contribution, and tax incentives, which would lead to higher disposable income:

• RM8.2bn: The government has introduced a newly enhanced cash assistance programme called Bantuan Keluarga Malaysia (BKM), previously known as Bantuan Prihatin Rakyat (BPR), benefitting 9.6m recipients. (BPR allocation: RM7bn benefitting 8.6m recipients).
• RM2.4bn: Expansion of welfare department aid to more than 440,000 households with new poverty figure of RM1,169 from RM980
• RM2.0bn: Reduction of Employee Contribution Rate From 11% to 9% Until June 2022.
• RM1.3bn: One-off Aid of RM700 to 1.3m Civil Servants Grade 56 and Below, and RM350 to 1m Retirees
• RM0.3bn: e-Start cashless transaction scheme will credit RM150 on a one-off basis into the e-wallet account of youths aged 18-20 years old, as well as full-time students in higher education institutions.

The government’s initiatives will also continue to focus on the unemployed to improve labour market situation:

• RM4.8bn: JaminKerja job guarantee initiative that will guarantee the provision of 600k job opportunities.
• RM2.0bn: Payroll incentive will be provided by SOCSO to employers, aimed to encourage the hiring of Malaysians who are not actively working.

MARKET VIEW

More cry than cheer. Broadly, Budget 2022 accords the much needed aid for those that have severely hit by the negative ramifications of Covid-19 as mentioned above. Nonetheless from a market perspective, we reckon there will be more cry than cheer in the short term given tax woes.

Taxman comes knocking. Perhaps the most obvious hit from Budget 2022 is the “Makmur Tax”, denting the upper tier of corporate Malaysia. This entails a one-off windfall tax whereby chargeable income for the first RM100m will be subjected to the existing corporate tax rate of 24% and anything in excess of that will be taxed at 33% for 2022’s assessment. Using our CY22 forecasted group earnings for the KLCI constituents (though not necessarily methodologically correct), we estimate the Makmur Tax would reduce our baseline projection by -11.4%. However, its actual impact may be lower as: (i) the tax is likely at the individual subsidiary level rather than group resulting to a lower taxable earnings base and (ii) foreign subsidiaries that contribute to group earnings should be exempted from this. Higher taxes aside, we believe there may be a secondary effect to corporate earnings – whereby companies may (i) delay profit recognition to mitigate the higher tax impact and/or (ii) undertake kitchen sinking exercises since earnings would already be hit by the higher tax.

Other Tax Measures. From a Market Perspective, These Include:

• Stamp duty and brokerage SST: Stamp duty on contract notes will be increased from 0.1% to 0.15% and the stamp duty limit of RM200/contract is abolished. Meanwhile 6% SST on brokerage will be removed. Our back of envelop calculation suggests that a trade size of RM1m would see trading cost roughly double. This could dent near term institutional investor participation on the market.
   
• Windfall profit levy on palm oil: Threshold price for windfall profit levy on palm oil will be raised by RM500/mt mt to RM3,000/mt for Peninsular Malaysia and RM3,500/mt for East Malaysia. Levy rate for East Malaysia will be raised to 15% (per mt of CPO) from 7.5% currently, while levy rate in Peninsular Malaysia will be maintained at 15% (per mt of CPO). This is positive for Peninsular Malaysia estates at every price level, but negative for East Malaysia estates when CPO price exceeds RM4,000/mt. In any case we do not expect current high CPO price to sustain over the longer term.

Near term downside inevitable. We reckon that market downside is inevitable in the near term as it is hard to ignore the “tax elephant” in the room. The saving grace from this is the Makmur Tax’s one-off EI nature which investors may eventually look past (hopefully). Pending more clarity from the corporates under our coverage on their respective tax impact, we keep our end-2021 KLCI target unchanged at 1,640 (16.7x PE on mid-CY22 EPS) but flag downside bias.

Source: Hong Leong Investment Bank Research - 1 Nov 2021