· Risk to growth widens. The official growth forecast for 2015 GDP was given a wider range of 5.0%-6.0% from a projected 5.5%-6.0% in 2014, suggesting that any upside surprise to growth next year would be pared down, mainly by the impact of various policy decisions ranging from the domestic impact of the implementation of GST to global market reaction towards US Fed’s expected rate hike.

· On target? Government is confident of achieving a balance budget by year 2020, starting by reducing its budget deficit to 3.0% of GDP next year from 3.5% in 2014 through further reduction of subsidies and revenue gained from the GST and improvement in the overall economy.

· It’s tough. Moderating global demand, weakening ringgit, rising cost of civil service as well as higher allocation towards financial aid (BR1M, PR1MA housing, etc) could raise fiscal operating expenditure. This brings our budget deficit forecast to be slightly higher at 3.2% of GDP next year.

· Paving the road to 2020. A substantial amount has been put aside for development expenditure, ramping up the nation’s infrastructure. Apart from additional physical infrastructures in urban and rural areas, there is more emphasis on soft infrastructure, dealing with support for SMEs and entrepreneurs, the education system, social and worker’s welfare, and R&D amongst many others.

· Cushioning higher cost of living. The BR1M was increased for those currently receiving the aid.

However, we would have rather seen distribution of food stamps and vouchers to stem abuse and a wider range of those eligible for the BR1M.

· Not enough to boost disposable income. Apart from the reduction in income tax, there was little else for those in the middle-income group. Individual tax relief lacks punch. There should have also been some reassurance of the individual income tax rate for 2016 as was given to the business sector.

· Corporate cheer for 2016. In 2016, corporate income tax rate will be reduced by another 1%, to 24% from 25% and income tax rate for SMEs will be reduced by 1%, to 19% from 20%.

· Boosting new home ownerships. Apart from more affordable houses being built, the government has also made it easier to own homes; through Rent-to-Own schemes, raising ceiling price for 1st homes, amongst others.

Overview

Stepping up fiscal reforms. Considering that this is the final Federal budget under the 10th Malaysia Plan (10MP), there is much emphasis on preparations for the 11th Malaysia Plan (11MP). Apart from ensuring the economy remains above its potential long term growth trend of around 5.0% to achieve the Wawasan 2020 target of becoming a developed nation, the government is also making sure that the rakyat are prepared to face new realities of rising cost of living. Closer in the timeline, the 2015 Budget showcases ways to manage rising costs for both individuals and corporates, as the government continues on the path of fiscal consolidation to reduce deficit further. At the same time, the government is also stepping up its development spending to stimulate the economy, judging by the enlarged allocation. However, more could be done to alleviate the high costs of living, especially those in the middle income, who had little to gain from the 2015 Budget aside from the reduction in income tax rate.

Growth Outlook

Stronger 2014. Following a better-than-expected GDP in the 1H14, it is unsurprising to see the government retaining a positive outlook on the Malaysian economy for the remainder of the year. The Ministry of Finance has revised its 2014 GDP forecast to 5.5% - 6.0%, adjusting up from its earlier target range of 5.0% - 5.5%. We are looking at the high end of that target, as we foresee that growth trajectory could still maintain a pace of up to 5.7% in 2H14, following a strong growth momentum in the 1H14 at 6.3%, on the back of strong external demand and domestic spending. The domestic situation, despite being burdened by higher costs effecting consumption, remains resilient on private investment and strong support from exports on demand from the US, UK and moderately performing emerging economies.

Spill over to 2015. This will continue to spill over and support growth in 2015 but there are however, eyes of caution towards the West where worries rise on geopolitical tensions in the Middle East and Eastern Europe, and the sluggishness of growth in the Eurozone. Additionally, growths worries abound on the possibility of an earlierthan-expected interest rate hike in the US and that will lead to strong volatility in the forex and capital market. Though a weaker ringgit may be advantageous towards exporters, for the domestic economy, higher import costs is an additional burden to already high costs as a result of continuous fiscal consolidation and GST implementation. Inflation rate is expected to be even higher next year, between 4.0% - 5.0%, the highest annual average seen since 1992 and considerably high above the long-term average of 3.0%. Uncertainty abound. Given the heightened uncertainty next year, the MoF projects the GDP to grow by a wider range of between 5.0% to 6.0%. Judging by the expectation of a sustainable global consumer electronics demand cycle, growth in 2015 will continue to be spearheaded by exports though understandably at a smaller pace compared to 2014 as a high base effect has to be taken into consideration. Notably, the MoF forecast value-added exports to grow moderately by 2.1% from 3.5% this year. This would still support the manufacturing sector, which is forecasted to grow 5.5%, albeit slower compared to 6.4% this year. Despite further global recovery next year benefitting export-oriented industries, particularly the E&E sector, the overall growth upside would likely be weighed down by slackening domestic demand on account of moderating consumption due to the impact of the implementation of GST.

Project driven. Other sectors which are expected to drive the economy next year will be the construction sector, which is projected to grow by 10.7% (2014: 12.7%) on on-going and new major infrastructure projects under the Economic Transformation Programme (ETP) and in preparation for additional projects under the 11th Malaysian Plan. The mining sector is expected to make a comeback on projects undertaken to enhance oil recovery from existing fields, and exploration and discovery of new fields. The sector is projected to expand to 2.8% from 0.7% this year. The services sector will gain from expansion across the board, particularly through trade-related services, construction services, finance as well as communication, especially in light of Digital Malaysia, an effort to enhance connectivity nationwide. Overall service sector’s growth is expected to moderate to 5.6% in 2015 from 5.9% in 2014, partly dampened by modest domestic demand and tapering exports growth momentum.

Domestic support. On the demand side, apart from exports, the private sector is expected to continue to take on the wheel as the public sector takes a back seat. Private sector investment is anticipated to grow by 10.7% (2014: 12.0%), supported by on-going projects under the 10MP and ETP. The public sector will be seeing a 4.7% (2014: 2.6%) increase in investment as they gear up towards supporting projects in the 11MP, the final leg of the race towards Wawasan 2020. Meanwhile, in spite of its commitment to reduce deficit, public consumption is expected to increase slightly in light of higher inflation and bigger allocation towards social welfare. Hence, public consumption growth projected to expand to 3.8% from 2.1% this year. On the other hand, private consumption is projected to moderate to 5.6% from 6.5% this year. All in all, based on MoF’s forecast, aggregate demand for 2015 is expected to moderate slightly to 6.2% from 6.4% in 2014.

Source: Kenanga