• With a 10% growth in total expenditure, Budget 2021 addresses the needs of everyone. Including a surprise cut in taxes and a reduction in employee EPF contribution, focus remains on domestic demand to support growth in the coming year
• This expansionary budget will result in a budget deficit of 5.4% of GDP in 2021E. However, in the event of a prolonged and widespread lockdown due to Covid-19, we think the government still has room to fiscal pump-prime
• We expect the gloves to rally, as a key overhang is removed. Other sector beneficiaries are the Construction sector and Cellular operators. No additional taxes for the sin sector and BAT could also benefit from increased government focus to tackle the illicit cigarette market
• 2021 Economic Outlook and Fiscal Outlook – Government Financial Position
• Based on the assessment and projection on the country’s economic prospects for 2021, the Ministry of Finance (MOF) expects real GDP growth to recover and expand by between 6.5% and 7.5% in 2021, rebounding from -4.5% estimated for 2020. Notwithstanding the narrowing of the GDP growth forecast range from an earlier official estimate of between 5.5% and 8.5%, the Treasury’s projection at midpoint of 7.0% in 2021 (calculated based on GDP absolute values at constant price), signals an official view of continued improvement in domestic economic conditions despite these challenging times with the COVID-19 pandemic.

Tax and Expenditure for 2021 Budget Is Expansionary

Generous measures are introduced for the people and business in the 2021 Budget, where the tax and expenditure programme of the Federal Government also takes more precedence in supporting economic growth than fiscal consolidation. Total expenditure allocation (including operating and development expenditures) of RM305.5bn is 10.4% higher than a decline of 12.8% estimated expenditure for 2020, where operating expenditure is projected to increase by 4.3% to RM236.5bn in 2021, while development expenditure is expected to increase by 38% to RM69bn in 2021 (RM50bn in 2020). Federal Government is projected to incur a budget deficit of RM84.8bn or -5.4% of GDP in 2021, compared with a deficit of RM86.5bn or -6.0% of GDP in 2020.

Overhang for Glove Sector Removed

From an equity perspective, there were several pleasant surprises. First off, a speculated windfall tax for the glove sector had not materialised. Instead, the 4 large glove players would contribute RM400m to the government for the procurement of a Covid-19 vaccine and medical equipment. The estimated impact to net profit for the respective companies is a mere 3-5%, which we believe is marginal, and hence likely to spur a sector rally in our view, post this major overhang.

Construction and Cellular Operators Also to Benefit

Higher development expenditure at RM69bn (+38% yoy) should be a positive for the construction and infrastructure sector, although the sector may fail to outperform considering political uncertainty given the prospects of an early election going into 2021. The telco sector is also set to benefit from a RM1.5bn aid to the B40 segment to ensure access to broadband. This in our view should help preserve ARPUs particularly for the cellular operators, which are seeing intense competition. Meanwhile, the regulator, MCMC has also been allocated RM7.4bn to build and enhance broadband services over 2021-22, which ties in nicely with the broadband aid to the B40 segment.

Source: Affin Hwang Research - 9 Nov 2020