? Growth target upgraded for 2017; to remain elevated in 2018. The 2018 Budget saw a significant upward revision on GDP growth and a narrower range of 5.2-5.7% (previously 4.0-5.0%). Thereafter, MoF expects growth to possibly ease a little to 5.0-5.5% in 2018.

? External factors conducive to growth. Despite lingering risk in the global economy, continued growth consolidation of the global economy, especially among the advanced economies, prompted increase in external demand and global investment flows. This is further supported by growth amongst major emerging economies.

? Fiscal consolidation theme persists. On continued fiscal consolidation agenda, the government is confident to reduce the fiscal deficit to 3.0% of GDP in 2017 and to 2.8% of GDP next year facilitated by both prudent budgetary management and higher economic growth.

? Revenue enhancement to provide more fiscal space. Better-than-expected economic prospects observed in 2017 are expected to help improve revenue collection, particularly on personal and corporate income tax. This was further supplemented by stricter collection and enforcement efforts.

? Oil prices strengthens; revenue upside. On oil prices, MoF expects oil price to average USD50/barrel in 2017 before advancing to USD52/barrel in 2018, likely supported by OPEC’s measures to support oil prices.

? Managing OPEX growth. The OPEX is projected to expand 4.6% and 6.5% for 2017 and 2018 respectively (2016: -3.1%). The increase largely stems from higher payment of emoluments and retirement charges, along with supplies and services. This was met by cuts largely from subsidies and social assistance;

? DEVEX growth remains below 11MP ceiling. Net DEVEX expanded 11.5% in 2017 (2016: 3.5%) though this was likely due to the shortfall in realised DEVEX in 2016. It is expected to be relatively flat in 2018 at around RM45.4b, around 18.0% of the 11MP ceiling.

? Applying restraint. To achieve a lower deficit target, the government is targeting total budget spending (OPEX+DEVEX) to remain below 20% of GDP in the coming years. At the same time, this requires total revenue to grow by more than 6.0% annually. This is not an easy feat given the uncertainty in the global economy and fluctuating commodity prices.

? Higher net borrowing to see a GII focus. The deficit will be financed by a 5.5% increase in net borrowing or 25.4% increase in gross borrowing (2016: -7.1% and -2.4% respectively). This, in turn, will largely comprise Malaysian GII; net borrowing in GII is expected to rise 63.4%.

? Casting far and wide: The budgeted allocations are targeted at a wide spectrum of areas, which will improve the wellbeing of the rakyat, and address the perennial issue of rising costs of living amidst a slower growth environment.

? Election-themed. Tax reduction for the middle income group, BR1M, special payments to civil servants and head of small communities, large allocation to the agricultural sector, targeted spending in the East Coast (Kelantan) and East Malaysia states, all seemed to suggest attempts to secure popular support for the coming 14th General Election (GE14) expected to be held early next year.

Overview

Another rakyat-focused budget. Budget 2018 again centres on building a more inclusive economy for the rakyat and raising Malaysia’s competitiveness in selected sectors. The proposals announced by the Prime Minister Datuk Seri Najib Abdul Razak, who is also the Finance Minister, continue to address the needs of the majority, particularly the B40 and M40 groups. As the third budget under the 11th Malaysia Plan, it also aims to gradually reduce the nation's fiscal deficit, amidst a challenging economic environment and in anticipation of an upcoming General Election.

Boosting economic resilience. Apart from wining people’s hearts, the budget’s mainly focuses on regaining investor and consumer confidence while striking a balance between the need to consolidate and, if need be, to raise public spending to ensure the economy becomes more resilient to face growing instability in the global economy. The budget also lays the foundation for the aspirations of National Transformation 2050 or TN50.

Casting far and wide. The budgeted allocations are targeted at a wide spectrum of areas, which will improve the wellbeing of the rakyat, and address the perennial issue of rising costs of living amidst a slower growth environment. Having said that the budget contains various popular measures — infrastructure spending, more funding for social welfare, continued cash handouts to the lower income group, special payments to civil servants and pensioners, as well as measures to help deal with housing affordability are high on the list.

2017 Growth Outlook

A more buoyant 2017 outlook. As expected in our 2018 Budget Review, the 2018 Budget significantly upgrades its assessment for the economy in 2017. The Ministry of Finance (MoF) now projects a narrower 5.2-5.7% growth with an implied average growth projection of 5.4%, a substantial upgrade from its prior projection for a 4.0-5.0% growth range (made during the 2017 Budget) and Bank Negara Malaysia’s (BNM) 4.3-4.8% growth range. The MoF revision is tilted on bullishness relative to Bloomberg’s median consensus estimate of 5.1% (ranging from 4.3-5.6%) though it is well within the house forecast of 5.4%.

sparked by stronger 1H17 economic conditions. The upgraded growth outlook in the 2018 Budget is largely consistent with strong outperformance of various growth indicators (such as the industrial production and external trade data). Furthermore, Malaysia’s 1Q17 and 2Q17 GDP growth of 5.6% and 5.8% respectively easily surpassed their respective consensus estimates of 4.8% and 5.4% respectively, making the previous forecast range of 4.0-5.0% unsustainable. Our house view is that 3Q17 and 4Q17 GDP growth is expected to remain elevated albeit tapering at 5.3% and 4.8% respectively (2016: 4.2%)

Source: Kenanga Research - 30 Oct 2017