OUTLOOK SUMMARY

• A tough budget. The statement by the Minister of Finance that the upcoming 2019 Budget would be a “difficult” one is enough to confirm that the government is committed to fix the mess left by the previous administration. This means the new Government would have to undertake a herculean task to fix its balance sheet and at the same time steer the economy out of an impending economic slowdown in the coming years.
• Fiscal prudence. While the Government has already committed to rationalise or cut spending on its operating expenditure, it has also indicated in the Mid Term Review of the 11th Malaysia Plan (MTR 11MP) recently that it would reduce the planned allocation of the development expenditure from this year till 2020. Furthermore, an expected slower global growth this year and the next would mean potentially less revenue for the Government.
• Limited revenue boosting options. The abolishment of the Goods and Services Tax (GST) would leave a big hole in the Government coffers that its replacement, the Sales and Services Tax (SST), wouldn’t be able to plug it. While this would mean no increase in corporate and individual income tax, the Government has given some thoughts on broader tax reforms namely introducing the inheritance tax, capital gain tax, or even new taxes on soda and on e-commerce.
• Fiscal discipline + slower growth = wider deficit. Even if the Government introduce new taxes along with cutting operating expenditure, selling off its prized assets and hoping that its oil & gas revenue would sustain throughout the budget period we reckon it may still be challenging to reduce the size of the fiscal deficit. Along with the slower growth outlook, we would expect the fiscal deficit to widened and breach 3.0% of GDP for both this year and 2019 though some improvement and a slight reduction of deficit for next year.
• Supporting economic growth, a priority. While the Government is committed to fiscal and debt consolidation, we would still expect the budget to be slightly expansionary to support and mitigate any sharp slowdown in the economy. On the back of rising global economic uncertainty, and taking the que from the MTR 11MP, we expect the MoF’s GDP growth forecast to be between 4.5%-5.0% for 2018 and 2019 respectively, slightly lower for the latter.
• Debt consolidation. Restructuring and paring down the Government’s overall debt and the size of guarantees and contingent liabilities are necessary to ease the rising fiscal debt burden. Though this may take a long time it would help to give the perception that the Government is making serious effort to resolve it.
• Investment focused measures. To further prepare the economy for the uncertainty and challenges on the global front we expect the new Government to announce measures to promote investments and innovation. This would mainly involve promoting and incentivise SMEs to embrace computerization of manufacturing under Industry 4.0. Other focus areas to promote investments would be in transportation, automotive, e-commerce, renewable energy and tourism.
• Emphasis on education/training. Allocation for education may likely be increased to improve on primary and tertiary education level as well as to promote upskilling for adults to smoothen the transition into Industry 4.0.
• Supporting the have nots. The Government may announce alternative measures to help ease the burden of the B40 group in view of replacing cash handouts (previously BR1M). Meanwhile, fuel subsidies may be reviewed to make it more targeted.

Source: Kenanga Research - 29 Oct 2018