OVERVIEW

● From manifesto to a plan. The mid-term review (MTR) of the 11th Malaysia Plan (11MP), tabled at the Parliament yesterday by the Prime Minister Tun Mahathir Mohamad, showed that the new Pakatan Harapan Government is taking it up a notch to fix the economy after facing numerous issues in fulfilling its promises outlined in its pre-election manifesto. With a tag line “New Priorities and Emphases”, it aims to reform existing policies and outline the revised socioeconomic targets for the remaining three years (2018-2020) of the five-year 11MP after it examined what has been achieved in the first two years (2016- 2017).

● Taking to the next level. The MTR report, prepared by the newly-formed Ministry of Economic Affairs under Dato' Seri Mohamed Azmin Ali, outlines the realignment of socioeconomic policies and strategies to eventually be part of its governing policy. As in previous plans, focus will be on stimulating economic growth with emphasis on ensuring greater benefits for all segments of the society.

● Six pillars. Conceptually, the new plan is based on six pillars that will focus on: 1) reforming governance and improving public service delivery; 2) enhancing inclusive development and wellbeing; 3) pursuing balanced regional development; 4) empowering human capital; 5) ensuring environmental sustainability; and 6) strengthening economic growth. The six pillars will provide a new development focus with 19 priority areas and 66 strategies which are aligned to the new direction of the Government to further boost economic growth.

● Resetting macroeconomic targets, addressing inequality and rising debt. Facing the realities of rising challenges in the global economy, the Government pared its economic growth target and abandoned a plan to balance its budget by 2020. It also places greater focus on addressing income inequality and putting a high priority to rein in debt.

● More realistic growth targets. The Government is targeting average GDP expansion of 4.5% to 5.5% in 2018 to 2020, compared with the 5.0% to 6.0% target for the 2016-2020 road map set by the previous administration. We believe that the new growth target is more realistic given the current challenges facing the global economy. This would be in line with house GDP forecast of 4.8% and 4.7% for 2018 and 2019 respectively. To achieve a growth of higher than 5.0% portend the economy growing above trend which we reckon would be challenging given that the global economy is projected to slow next year according to the International Monetary Fund in its latest World Economic Outlook release and the US may experience a recession as early as the 2H19 or in 2020 But the emphasis by the government on productivity improvements and focus on domestic demand is a move towards a right direction.

● Wither high income status by 2020. Based on the new growth target, per capita income is expected to reach RM47,720 or USD11,700 in 2020, below the estimated minimum income threshold of a high-income nation. The current threshold as defined by the World Bank is USD12,056 or more in 2017. The Government now anticipate hitting the threshold by 2024. Aside from striving to achieve high income and stronger purchasing power objectives, the Government realised that to become a developed and inclusive nation it requires the nation to progress in many other dimensions, such as economics, politics, culture, psychology, spiritual and social. However, the plan lacks in providing a more comprehensive strategy to address the issue of the “middle income trap” that is befalling many developed and developing countries including Malaysia.

● Fiscal consolidation a priority. The budget deficit, which was set to be balanced in two years, is now estimated to widen to 3.0% of GDP. This is in line with our view that given the shortfall in revenue as a result of the removal of the Goods and Services Tax (GST) along with the slowing GDP growth, it would be more realistic to expect the fiscaldeficit to exceed 3.0% of GDP from 2018 onwards. Nonetheless, the extension of the budget deficits beyond 2020 reflects the enormity of the issues with regards to the current financial state of affairs that the new administration inherited from Barisan Nasional.

● New taxes to offset loopholes in government coffers. To plug the huge revenue shortfall after scrapping the GST, the Government is exploring new taxes and revenue generation alternatives. Among others is a tax on online transactions in view that e-commerce and activities related to sharing and digital economy are set to rise. A tax on capital gain from investment and even inheritance tax is being considered. Meanwhile, nontax revenue will be enhanced, for example by maximising the cost recovery of Government assets, where more agencies will be empowered to improve the utilisation rate of assets and the funds accrued will be used to finance operating costs, particularly for asset maintenance.

● Fiscal reforms and better debt management. The operating expenditure will be further consolidated in the remaining 11MP period. Among the measures include reforming Government agencies, strengthening the procurement process through open tenders as well as restructuring debt. Additionally, development expenditure ceiling will be rationalised from the original allocation of RM260.0b to RM220.0b for the overall 11MP period. Furthermore, increased private sector involvement in driving the economy will alleviate the impact of the reduced public sector investment. According to the new plan, public investment will focus on strengthening public infrastructure and developing economic enablers. We believe the government is committed to adopt greater transparency in public finance and this would accelerate the full implementation of accrual accounting.

● Coming clean and transparent on government liability. Reigning the burgeoning debt has become the government’s priority. Announcing the actual liability that the government is currently shouldering is a crucial step towards resolving its debt problems. While the official published Federal Government debt level stood at 50.8% of GDP as at end of 2017, combined with contingent liabilities and commitment made under public-private partnership projects, it comes to 80.3% of GDP, according to the MTR report. We believe, the new administration emphasis on a broader government debt commitment by taking into account the contingent liabilities and other obligations gives a clearer picture of what needs to be done to reduce the growing debt burden. The Government’s debt service or payment of interest on its debt is in excess of RM30.0b yearly.

● Boosting current account management. On the external front, the Government has laid out strategies to enhance exports while managing imports in order to achieve a trade balance surplus target RM118.3b by 2020. Among others, it wants to improve the export ecosystem, move up the value chain for export products, step up the internationalisation of services, promote the higher use of local inputs in major infrastructure projects, and spread out the imports of “lumpy” capital goods over a longer time period. The current tone of government to boost the export sector would ensure that the current account balance would remain a surplus, sustaining a higher level of national saving rate over investment or resource surplus. This would help to support the Ringgit which has been languishing during the period in review compared to during the 10th Malaysia Plan (10MP) period. Average USDMYR exchange rate during the 10MP was 3.30 (2011 to 2015) while during the review period (2016 to Sep 2018) was 4.16. Our year end 2018 USDMYR target is 4.05 while for end 2019 is 4.10. Currently the USDMYR is trading around 4.15/16.

Source: Kenanga Research - 19 Oct 2018