· Growth forecast revised. Official growth forecast for 2015 GDP has been revised to 4.5% - 5.5% from 5.0% - 6.0% to reflect weakening global growth. It is still in line with our forecast of 5.1%.

· Deeper fiscal reforms and consolidation. To balance out revenue loss on declining oil prices the government plans to slash operating expenditure by RM5.5b. Development expenditure allocation remains intact.

· Oil price assumption revised to US$55/barrel (vs US$100/barrel) for 2015, leading to a revenue shortfall of RM13.8b.

· Deficit target revised. Even with the cut in operating expenditure there is still a shortfall of RM8.3b to be addressed, adding to the fiscal deficit which is revised to 3.2% of GDP for 2015 from 3.0%.

· Realistic target. Assuming the shortfall is only partially addressed and given the lower projected GDP growth the fiscal deficit could still exceed 3.2%. We are revising our fiscal deficit forecast to 3.5% of GDP.

· The current account to remain in surplus albeit at a lower 2.0%-3.0% of GNI (vs 5.1% in 2014).

· Boosting domestic economy. RM5.0b to be set aside to boost private investment alongside other measures to promote domestic growth and exports. Planned subsidy rationalization for electricity and gas tariff has also been postponed in hopes to spur consumption.

· Flood aid. With estimated damaged to be about RM2.9b the Government has set aside additional funds to be funnelled towards flood-effected people and businesses. Financial institutions will also be lending a hand on personal and business loans.

Growth Outlook

A stuttering start. With the unprecedented fall of global oil prices due to increased supply and weak demand, the global economy doesn’t seem to be looking to end 2014 on a very good note – nor does it look to be starting 2015 on a high one. At 7.4%, China’s 2014 annual GDP was the slowest pace since 1990 as the country goes through a bout of multi-level economic reforms to cater for its growing domestic economy, thus switching from traditionally export reliant economy to one of domestic independence. In the land of the rising sun, Japan’s private sector is struggling to gain traction, unable to rebound from the sales tax hike in April 2014 and officially fell into recession in the 3Q14 (1.9% contraction). This led to additional stimulus spending and a delay in the 2nd consumption tax hike. Japan will need deeper structural reforms this year and it may be a while yet before we see monetary, fiscal and structural policy reforms reflected in numbers. In the final month of 2014, Eurozone’s inflation turned negative as prices fell by 0.2%. Deflation is no longer a threat but a reality, the Eurozone is marred in fears that the situation will worsen and spread. Though falling energy prices is one of the reasons behind the negative inflation, it isn’t the sole perpetrator. Sluggish demand remains the main threat, as inflation calculated sans energy prices was at a mere 0.6%, far below the ECB’s target of close to 2.0%. Deflation exacerbates the troubling situation in Greece as deflation increases the debt burden, and Greece's indebtedness to its international bailout creditors is a key issue in the current general election campaign. There is once again talk of the possibility of a Greexit (Greek exit) from the Eurozone. Couple with a stubbornly high unemployment rate in the Eurozone, all eyes are on ECB President Mario Draghi to announce a stimulus package soon, alike the QE seen in the UK and the USA. The USA alone seems to be moving in the right direction, though labour participation rates remains disappointingly low. Nonetheless, there seems to be a higher chance of the Federal Reserve finally embarking on a rate normalization sooner than later.

Growth revision. It is of no surprise that the IMF slashed global forecasts again. World GDP is expected to grow by 3.5% in 2015, down from its October 2014 forecast of 3.8%. China’s growth was slashed to 6.8% from 7.1%, Japan’s to 0.6% from 0.8% and the Eurozone to 1.2% from 1.4%. Forecast for the US on the other hand was revised upwards to 3.6% from 3.1%. So it was somewhat expected that the government revised down its GDP projection for 2015 to between 4.5% to 5.5%, from 5.0% to 6.0% forecasted during the Budget last October.

A boost for exports. The global situation hasn’t been good towards exporters, a significant player to the nation’s growth. The Budget outlines some supportive measures for the exports of goods and services sectors (please refer to Specific Measures). This may partly aid to mitigate sluggish global demand. This will also help the keep the current account balance in a surplus.

Less reliance on oil & gas. On that note, the Prime Minister was keen to address the issue of falling global oil prices and its impact on exports. Though Malaysia has long been an oil exporter, this remains true for crude oil, which remains in a surplus of RM7.7b in the first eleven months of last year. However, Malaysia is an oil importer for petroleum products (which includes refined oil, which is what impacts prices at the petrol pump) with a deficit of RM8.9b till November last year. This means that Malaysia has now become a net oil importer with a deficit of RM1.2b (fig.1). The graph also shows that the recent years have seen lesser and lesser exports of crude petroleum and its products. Petroleum and petroleum products only amounts to 10.4% share of total exports compared to 36% of E&E goods, the main driver of exports.

Supporting aggregate demand. The Budget revision speech gives off a vibe that the government is also becoming more wary of the situation of the domestic economy. Despite lower petrol prices, due to the country’s age long reliance on petrol subsidies, the impact it has on consumption is not prominent. We are not likely to see any retailers reducing costs, nor are expected to see consumers increasing spending. The rise of petrol prices last year, followed by electricity and gas tariff hike is still fresh in the mind of the people. Coupled with the expectation of a GST implementation this year, more needs to be done to spur consumption and private investment. Henceforth, the revised budget details some steps to spur consumption (please refer to Specific Measures).

Source: Kenanga