OVERVIEW

● Growth target lowered for 2018; a slight recovery in 2019. The 2019 Budget saw a significant downward revision on the 2018 GDP growth forecast to 4.8% from 5.0-5.5% previously. A slight improvement seen in 2019 at 4.9%. While our 2018 growth projection matches official target, we are projecting a slightly lower GDP growth of 4.7% next year.

● Domestic demand key to growth resilience. While exports are expected to moderate mainly due to slower global trade, domestic demand particularly private sector spending and investment would remain supportive of growth. Meanwhile, public spending is expected to slow in 2018 (+0.1%) and contract in 2019 (-0.9%) mainly due to lower capital spending by public corporations as a result of project reviews and deferment.

● Big fix – reform in the works. Having inherited a mess from the previous government, the new team will implement fiscal reforms that would adjust both fiscal spending and tax revenue to achieve a better fiscal position: reduction in deficit and debt. It would be monitored under the Medium-Term Fiscal Framework (MTFF), an indicator of the government’s three-year fiscal discipline beginning 2019 till 2021.

● Fiscal reset. To account for the narrow revenue base, additional provision for off-budget items and tax refunds as well as rising expenditure and debt, the Government will reset its fiscal consolidation path starting in 2019. Hence, the 2018 budget deficit forecast is revised to 3.7% of GDP from 2.8% and set 3.4% as the target for 2019.

● Fiscal stance to remain expansionary. Despite consolidating, the Government’s fiscal stance would remain expansionary. This is reflected in the development expenditure record allocation of RM54.9b and RM54.7b for 2018 and 2019, respectively, as well as 8.2% and 10.4% increase in operating expenditure (Opex), respectively.

● Managing ballooning OPEX. The Government’s commitment to settle tax refunds, off-budget items as well as debt service charges are reasons for opex to rise sharply by 10.4% in 2019. A sum of RM37.0b is allocated for payment of outstanding tax refund (Income tax refund: RM18.0b; GST refund: RM19.0b). As this would be a one-off payment, it would subsequently bring down the opex thereafter.

● Bumper revenue expected. The bulk of the total revenue increase for this year and 2019 would mainly be drawn from non-tax revenue which is projected to surge by 44.5% and 38.7%, respectively. Sizeable dividend pay-outs from Petronas and Khazanah as well as one off contribution from KWAP plus asset sales are the main contributors of the projected overall revenue increase of 7.3% and 10.7% for 2018 and 2019, respectively.

● Oil dependency risk. The assumption for oil price remains high at USD70/barrel for 2018, a big revision from an earlier official assumption of USD52/barrel. An expected slower growth for the global economy and a steady rise in global supply may see crude prices fall below USD70/barrel in 2019 which may pose risk for the Government to achieve its fiscal revenue target.

● Dealing with debt. Government debt remains manageable and expected to reach 51.8% of GDP by end of 2019 (2018F: 50.7%). Meanwhile total public liabilities (committed contingent liabilities and leased payments), is projected to be reduced to 73.5% of GDP from 74.6% as at the end of 2018. We believe that this would be sufficient to allay concern that it may prompt rating agencies to downgrade Malaysia’s sovereign debt rating.

● Giving back to the Rakyat. Selective cash handouts to B40, targeted fuel subsidies, bigger allocation for education, transportation and housing, bonus for low ranking civil servants and pensioners among other, all seemed to suggest it’s the Government’s way of saying thank you to the people after its historic victory at the GE14.

Source: Kenanga Research - 7 Nov 2018