OVERVIEW

● Fiscal consolidation as key agenda, emphasis on Industry 4.0. The government commits to fiscal optimisation whilst preparing the nation for Industry 4.0, guided by the Shared Prosperity Vision 2030. The government stands ready to act, should external growth slumps.

● 2019 GDP forecast revised, slight uptick in 2020. The Ministry of Finance (MoF) revised its 2019 growth forecast, from 4.9% to a still-ambitious-level of 4.7% (2018: 4.7%), exceeding house forecast of 4.5%. The MoF pencilled in 4.8% growth in 2020, in contrast to house and consensus view of further economic moderation next year (KIB and consensus: 4.3%).

● Domestic demand anchors growth. Growth to sustain in 2019 on firm private expenditure (2019: 5.6%; 2018:7.1%), masking the subdued external demand, and to nudge higher in 2020 on turnaround in public spending (2020: 0.8%; 2019: -1.8%), reflecting spillovers from the revived infrastructure projects.

● Fiscal stance to remain expansionary. In spite of the ongoing effort to fix the fiscal balance, the PH government would continue to pursue a pro-growth fiscal expansionary policy to beef up the resiliency of the economy. This is reflected in the higher allocation for both operating and development spending in 2020, after excluding the one-off tax refund of RM37.0b allocated in 2019.

● Fiscal deficit to narrow. Backed by the gravity-defying GDP projection of 4.8% in 2020, the government sees fiscal deficit to narrow to 3.2% of GDP in 2020, from 3.4% (forecast) and 3.7% (actual) of GDP in 2019 and 2018 respectively. This is slightly higher than our baseline deficit forecast of 3.3% of GDP.

● Committed to prudent fiscal planning. The overall growth and fiscal forecasts under the 2020-2022 Medium-Term Fiscal Framework (MTFF) were revised lower than the 2019-2021 MTFF, suggesting a deterioration in the overall economic outlook. Hence, in the medium term, we should expect the government to be more conservative in managing public finance; more inclined towards promoting fiscal discipline, optimisation and maintaining budget predictability.

● Reducing dependency on oil revenue. The government has reduced its dependency on petroleum-related revenue from 9.2% of GDP in 2009 to around 5% in 2019. This is a positive trend and would bode well with the government’s effort to reduce its dependency on mineral-based revenue as well to diversify and broaden its tax base.

● Enhancing tax revenue via a diversified tax base. Tax collection is expected to be the main contributor to the government coffers in 2020, backed by better corporate earnings prospects and initiative to enhance auditing and tax compliance as well as efforts to broaden and diversify the tax base. Nevertheless, in terms of effectiveness, the better option would be to reintroduce the Goods and Services Tax.

● Sustainable long-term growth via equity distribution. The allocation for expenditure would largely focus on strategic and high-multiplier effect projects that would boost general efficiency and productivity, as well as improve the income and welfare of the people.

● Mixed priorities. On closer scrutiny, the biggest increase in terms of the 2020 DE allocation of RM56.0b is led by energy and public utilities (+67.9% ) followed by agriculture and rural development (+28.7%), health (+28.3%), and transportation (+8.8%). However, these increases are at the expense of a reduction in the budget for trade and industry (-19.1%), housing (-18.5%), environment (-10.8%), education and training (-1.9%) and security (-2.0%).

● Debt remains manageable. Based on the Debt Sustainability Analysis, Malaysia’s gross financing needs will decline to 7.4% of GDP in 2024 from 8.9% in 2019, assuming a gradual fiscal consolidation in the medium-term. Similarly, the Federal Government debt is projected to remain manageable, registering at 50.2% of GDP in 2024. This is in line with the government’s commitment towards debt consolidation and achieve debt-to-GDP ratio below 50% in the mediumterm.

● Debt interest savings. Favourable low interest rate environment, high liquidity and increased investors’ confidence helped lower coupon rates for debt papers and consequently the debt service charge (DSC), which is projected to be reduced to RM33.0b or 12.5% of total revenue from an estimate of RM34.9b or 14.3% of revenue in 2019. This would translate to an estimated savings of about RM1.9b.

Source: Kenanga Research - 14 Oct 2019