KEY POINTS

Cautious optimism. While the government maintains 2016 growth forecast range of 4.0%-4.5% a broader 4.0%-5.0% is projected for 2017, buoyed by domestic demand. But a broader forecast suggests that optimism is tempered by global uncertainties.

Modest rise in trade; but surplus to narrow. Total trade is projected to expand by 3.0% in 2017 from 1.2% in 2016 on the back of global growth but higher imports over exports to reduce trade balance.

Fiscal consolidation to continue. Fiscal deficit to narrow marginally to 3.0% of GDP from 3.1% in 2016 on continued prudent spending along with a slight improvement in revenue stream.

Expenditure rationalisation in focus. Total gross expenditure is projected to rebound by 3.4% in 2017 (2016:-2.2%) with operating expenditure (OE) accounting for the bulk of the increase. Subsidies and social assistance along with grants to statutory bodies to see further reduction of 9.0% and 27.4% respectively.

Development expenditure (DE) still below 11MP target. While the 2017 DE is raised to RM46.0b from RM45.0b in 2016, it remains below the 11th Malaysia Plan (2016-2020) total allocation of RM260.0b or RM52.0b annually, suggesting its commitment to consolidation and prudent debt management.

Higher corporate tax, PITA and GST collection to boost revenue. Revenue collection is expected to grow 3.4% after two years of decline, led by projected 9.5% increase in corporate income tax to RM69.2b.

Stable oil prices. Average crude price assumption was raised to US$45/barrel for 2017 from a revised US$40/barrel (previously US$30-35/barrel) this year on expectation of further stability in global crude prices. Petroleum Income Tax (PITA) to rebound by 24.9% following two successive years of sharp fall.

Higher GST collection. Better economic outlook and further effort to improve process and collection of GST is expected to lead to a steady increase in GST revenue. Up 3.9% or RM40.0b expected in 2017.

GE-related spending? Higher development expenditure, earmarked for upgrading physical infrastructure (roads, transport systems, telecommunication and energy infrastructures) to mainly benefit the rural areas is indicative of the government calling for a General Election next year.

Goodies for civil servants. Civil servants will benefit from grants, access to financing for housing and motor vehicle, along with non-monetary benefits.

More cash transfers targeted to low income and vulnerable groups. Increased BR1M handouts and financing access to subsidised housing.

Overview

Cautious growth and revenue forecast. The 2017 budget starts cautiously optimistic of 2017 prospects. Stronger domestic demand, particularly from private sector consumption and investment, is expected to drive stronger growth in 2017. The external sector is expected to remain resilient though downside risks from external headwinds (uncertain global growth prospects and financial market volatilities) remains a consideration. The 2017 growth forecast of 4.0%-5.0% from 4.0%-4.5% in 2016 reflects some growth upside in 2017 though the wider range suggests that this optimism may be tempered by high uncertainties in the global economy.

Fiscal consolidation remains a prevalent theme in the 2017 Budget with the reprioritisation of expenditures under both operating and development expenditure. Despite modest growth in operating and developmental expenditure, subsidies and social assistance and housing social expenditure is expected to decline in 2017. Revenue growth is projected to recover to 2015 levels, supported by increases in corporate income tax from improving economic conditions, a modest recovery in oil revenue and higher GST collection. Expenditure growth continues to be modest, consistent with fiscal consolidation objectives.

Growth Outlook

Weak growth but edging to recovery. Malaysia will continue to see lower growth this year, in line with expectations from the budget recalibration exercise. However, improving consumer and business sentiments during the second half of 2016 sets the stage for a stronger domestic demand to carry growth through the 2H16 and beyond. Malaysia is likely to achieve its lowered growth target with a minimum growth of 4.0% in 2H16 with some upside potential.

Trade balance continues to narrow into 2016 as weak external demand prompted only marginal growth in exports (1.1% vs 1.6% in 2015). Higher imports, arising largely from consumption goods, further placed pressures on trade balances. While higher imports may well reflect favourable development in consumer and business demand, the depreciation of the ringgit may exert higher cost burden, particularly for manufacturing input and other capital goods.

Shaky recovery expected in 2017. Nascent global economic recovery projected in 2017 is a promising sign for Malaysia. We believe that a growth at the higher end of the 4.0-5.0% range is possible barring excessive adverse external shocks to the economy. However, substantial downside risks remain, especially in the context of China’s tepid growth, volatility from Eurozone, especially from the Brexit process, and the future of global oil prices, among others may place a damper on growth. Private demand continues to lift up growth. Improvements, albeit restrained, in business and consumer sentiments will help sustain Malaysia’s domestic-led growth. Given the ongoing fiscal consolidation and the mildly expansionary 2017 budget, the public sector will likely play a more subdued role in stimulating the economy in 2016 and 2017. Private expenditure is expected to expand 6.2% in 2017 from 5.9% in 2016. This is complemented by a corresponding 5.3% and 5.8% growth in private investments for 2016 and 2017 respectively, on the back of improving sentiments. Broad-based growth. Growth in 2017 is expected to be broad based across the board with most sectors and subsectors seeing improvements in growth rates relative to 2016. Official forecasts highlights the services sector (5.7% growth), in particular wholesale and retail (6.7% growth) and information communication (9.6%) for its resilient growth despite adverse economic situation. The manufacturing sector is also expected to see marginally higher growth at 4.1% in 2017 compared to 4.0% on the back of sustained demand.

Conclusion

A cautious budget for an uncertain 2017. The firm commitment to their fiscal consolidation will be good news for investors, rating agencies and fiscal hawks. Notwithstanding fiscal consolidation, the budget remains accommodative to growth as policymakers resist the temptation for excessive fiscal stimulus. The spotlight on vulnerable low income classes, along with the expansion of infrastructures, is likely to help spur growth in private consumption and investments during the year. This would also lead to higher profitability to retail sector and fill the government coffers with more tax revenue.

Lingering global risks. Uncertainties ranging from China’s slowdown, to the US Fed possible rate hike to Brexit as well as the low crude oil prices may throw a spanner in the works for the recovery of Malaysia’s external sector. We also do not discount of a “Black Swan” which is still of low probability to occur for now. For this reason, a wider 4.0-5.0% growth projection is prudent; a more conducive external environment will place Malaysia on a firm path to recovery. This, in turn, may help ease the pressure on the government’s fiscal consolidation effort.

Source: Kenanga Research - 24 Oct 2016