Highlights

• The 2013 Budget is expansionary, people-centric with lots of goodies for all segments of society.
• We expect measures to increase disposable income to have immediate impact on the economy.
• Agriculture and education sectors receive big allocation with a handful of measures.
• As in the past, fiscal sustainability remains a concern with the additional income measures adding pressure on the target deficit level.
• Official forecast for 2012 narrowed to 4.5-5.0%. For 2013, GDP growth is projected to range between 4.5-5.5% on robust private investment.
• Low Petronas dividend to weigh on revenue but expect room for higher tax collection.
• Operating expenditure is likely to be higher after Budget measures. Despite lower development expenditure allocation, enlarged public sector is expansionary on capex by NFPEs.
• Lower fiscal deficit in 2013 (4% of GDP) with bulk of the financing from domestic sources.
• Government debt likely to hit self-imposed ceiling of 55% by end-2013, making GST implementation imminent in 2014. The PM also gave strong hint of a new comprehensive taxation system.

Comments

• Neutral to slightly positive.
• It will benefit the rakyat from all walks of life. Coupled with the conclusion (of Budget Speech), it has a heavy election undertone. However, we expect the GE to be held next year given the “goodies” will only be in place next year as well as various events and holidays for the rest of this year.
• Biggest winners are consumers stocks but given that the yoy incremental additional income is marginal (RM9bn from Budget 2012) to RM10bn, expect consumption to sustain rather than significant boost.
• No sin taxes means selling pressure on casino stocks unjustified, expect positive reaction (see separate report).
• O&G another winner and expect the incentives to enhance long-term positive impact, in line with our expectations.
• Other winners are banking, aviation and insurance.
• Neutral on construction and telcos.
• Property only loser with RPGT hikes while other incentives only partly mitigate the impact. As market already widely expected this move, share prices likely to remain lackluster.
• Overall, expect muted market reaction with the exception of casinos.
• Our top picks remained unchanged

Overall View
The Budget 2013, as expected, focused on “enhancing the well-being of the Rakyat” to address the high cost of living as well as emphasis on education and increasing the talent pool. Besides continuing with BR1M 2.0, Schooling Assistant and 1Malaysia Book Voucher (raised from RM200 to RM250), additional measures to benefit military personnel, farmers, fishermen, pensioners, civil servants (bonus) and tax payers (income tax reduction for lower income bands as well as higher education related tax reliefs) ensure that rakyat from all walks of life will be having a big smile on their faces. This will help to sustain consumption in the country. The only blemish is the hike in sugar subsidy but we believe this is a necessary evil from the government’s fiscal standpoint and health consideration.

The “goodies” for all walks of life coupled with the PM’s conclusion (of its Budget Speech), have a heavy election undertone. While the 13th GE will be held in the near term, the timing is still the “greatest mystery” with recent talks of as early as Nov 12. However, given that the “goodies” will only be in place next year coupled with various events (national examinations, monsoon and Pilgrimage) and holidays (Deepavali, Awal Muharram and Sultan of Johor’s Birthday), we suspect the “big event” will likely be held next year rather than end of the year.

The Budget measures are estimated to inject additional RM10bn household income or 1% of 2013 nominal GDP. Coupled with focus on stimulating domestic investment (especially agriculture, oil & gas and SMEs), the government’s 2013 GDP projection of 4.5-5.5% is achievable, in our view. This is premised on sustain consumption as well as increase in domestic activities (especially from the construction and oil & gas sectors).

While the fiscal sustainability is still a concern strong hint of a new taxation system which is more comprehensive suggest that GST is imminent. If materialized, it will relieve the concerns about government’s limited revenue base.

Implications To The Market
As for the equity market, we believe that the Budget 2013 would have a neutral to slightly positive impact. Similar to Budget 2012, the biggest potential beneficiaries are consumer staples and retailers in view of the additional RM9.7m “income” to the nation. However, unlike Budget 2012 whereby the additional RM9bn income elevated consumption, the slight yoyo increase in Budget 2013 is expected to help sustain rather than provide significant boost to consumption.

We believe another “big winner” is the sin sector. Contrary to talks of sin taxes hikes ahead of the Budget, the absence of any such move is a significant relief to the sector, especially the casino subsector which was under selling pressure. Thus, we expect share prices, especially casino, to react positively to the Budget.

There were various incentives for the Oil & Gas sector which reaffirmed our positive view. While these incentives are longer term in nature (to promote Malaysia as a regional hub), the focused efforts and diligent execution will greatly enhance activities in the sector and thereby benefiting related companies.

The various measures to promote sukuk as well as retail participation in sukuk and bonds, TRX, Business Trust, Capital Market Foundation and civil servant new housing loans should provide more business opportunities to banking institutions although at different degree.

Other sectors that could benefit are aviation (from promoting tourism) and Insurance (from various insurance schemes for hawkers, fishermen, paddy farmers, armed forces and school children) but the total sum of RM124m is insignificant vis-à-vis the multi-billion industry. The tax exemption given to income received by annuity funds should also benefit the insurance sector.
Impact on construction is likely to be neutral given that vs. Budget 2012, this year’s budget has relatively lesser new projects with only incentives for the Klang River of Life and TRX projects). As for the rural infrastructure development and Industrialised Building System, the amount is relatively small with the latter only benefiting KimLun.

The incentives to promote usage of mobile internet among youth could spur demand, however, it will results in pressure on ARPU while the mobile telcos do not have an effective product structure to monetize date usage but continue to incur more cost to meet forever rising data demand. On the other hand, broadband programme for urban poor is expected to benefit fixed line players.

Property is the only loser with higher RPGT of 5%-points for disposal within the first five years. This could further slowdown demand over the next few quarters. Moreover, incentives for TRX and housing for rakyat would introduce more competition. This is only partly mitigated by higher income limit for My First Home and 50% stamp duty exemption for first residential property (price limit also raised to RM400k). Overall, it is slightly negative given the RPGT move. Although the move is widely expected by the market (contrary to our earlier expectations), we believe share prices of the sector is likely to remain lackluster.

We reiterate our view the Budget 2013 has a neutral to slightly positive impact on the market. Hence, we expect market’s reaction to be muted with the exception of casino stocks.

Economic View
The 2013 Budget is expansionary, people-centric with lots of goodies for all segments of society. On the industry side, measures are targeted at stimulating domestic investment, with special focus on the agriculture sector, oil & gas industry and SMEs. In view of the prolonged uncertainty in the global environment, the Budget measures are expected to provide support for economic growth in 2013.

Similar to last year’s Budget, we expect measures to increase disposable income to have an immediate impact on the economy. This time around, the income-side measures will benefit all segments of the society, ranging from tax payers (income tax rate reduction) to lower-income group (BR1M 2.0). Our calculation shows that these measures sum up to an additional RM10bn of household income, or 1% of 2013 nominal GDP. We also note that the total quantum of income boost for 2013 is higher than RM9.0bn in 2012.

Sectoral basis, the agriculture sector appears to be one of the largest beneficiaries of Budget 2013. Not only the sector is allocated higher operating and development expenditure (RM8.2bn; 2012: RM6.3bn), there are also a handful of measures to boost food production (i.e. paddy farming & fishery) while reducing cost of production to ensure affordability.

The education sector also receives a big allocation of RM38.7bn for 2013 in tandem with the launch of Malaysia Education Blueprint 2013-25. There are also grants and tax incentives for pre-school operators to elevate the quality of education. Tax deduction for children’s higher education and tax relief for National Education Savings Scheme have also been increased. Coupled with the various skill and training programmes, we are positive that all the measures will help to uplift the quality of labour and reinforce the transformation plans.

As in the past, sustainability of the fiscal position remains a big concern. On top of the projected fiscal deficit of 4% of GDP, the additional income measures (i.e. income tax cut, extended BR1M for singles & higher bonus for civil servants) will continue to add pressure on the deficit level. Also, the higher headcounts of civil servant (i.e. 10,000 recruits of police officers & 150 new MACC officers per annum) will continue to balloon its emolument spending. Having said that, the Government is expected to rake in additional revenue of at least RM500m from the RPGT revision and lower sugar subsidy (RM163m).

While GST was not mentioned in the Budget speech, the PM did hint that a review of taxation system is currently being undertaken to transit from income-based taxation to a more comprehensive system. We take this as a strong hint that GST will be slated for implementation from 2014, hence relieving the concern on revenue flexibility.

On growth projection, the official forecast for 2012 is now narrowed to 4.5-5.0% from 4-5% announced by BNM in March (see Figure #3) following the better-than-expected economic performance in 1H12. For 2013, the MOF forecasts that real GDP growth will remain stable at 4.5-5.5% with mid-point forecast of 5.0%, driven mainly by robust private investment and sustained consumption activities. On sectoral basis, the MOF expects growth to be higher across all sectors. The strong growth in the construction sector is expected to be sustained on bunching of civil engineering projects. On the demand side, growth is expected to be driven by a double-digit expansion in private investment, resilient private consumption, and positive contribution from net exports of goods and services.

Our assessment is that the MOF’s growth targets for 2012 and 2013 are achievable. Given that global growth will remain lackluster for the next six months (lack of fiscal room among major economies), the resiliency of the overall economic growth would depend on the speed of implementation of planned projects. Another area of concern is on the manufacturing sector. The MOF’s forecast of 4.9% for manufacturing growth in 2013 is premised on a global growth recovery to 3.9% (2012: +3.5%). Our view is that manufacturing growth will be stable in 2013 given the lackluster global growth.

Turning to the government’s budget, the MOF expects revenue to grow marginally by 0.7% in 2013 after surging by 11.8% in 2012, as increase in tax revenue (+4.4%) will offset the decline in non-tax revenue (-9.6%). It is reported that Petronas’s dividend will remain low at RM27bn (down from RM30bn in 2011) mainly on account of fuel-cost sharing mechanism. Nevertheless, judging from the tax revenue performance over the past two years, we believe there is some room for higher collection given stricter tax enforcement.

Meanwhile, operating expenditure (OE) will decline marginally by 0.3% in 2013 after a strong growth of 11.0% in 2012. Within the components, debt service charges (+8.8%), grants to state governments (+7.3%) and supplies and services (+5.3%) are among the items expected to drive up the OE. While emoluments are projected to decline slightly (-1.0%), we expect this item to turn higher on account of the Budget measures (i.e. more civil servants and higher bonus & pension). Hence it is likely that OE will end up recording an expansion in 2013 instead of a marginal decline.

After hitting a peak of RM52.8bn in 2010, the MOF has further trimmed the allocation of gross development expenditure (DE) to RM47.8bn in 2013 (2012: RM49.8bn). Agriculture & rural development (+73.4%) and trade & industry (+38%) are the only sectors with higher allocation. In our opinion, most of the planned infrastructure spending is undertaken by Government-linked agencies, which will not form part of the DE. Combining with the capex spending by NFPEs as well as the planned projects (i.e. TRX, MRT, Bandar Malaysia, etc.), the public sector development expenditure is actually expansionary in 2013.

All-in-all, the budget deficit will be lower at RM40bn (2012: 42.3bn). As percentage of GDP, the fiscal deficit will decline to 4.0% of GDP (peak: 7% in 2009). Judging from the trend in 2012, we still expect bulk of the financing requirement (>90%) will be from domestic sources given the ample liquidity in the financial system. For 2012, total Federal Government debt is expected to increase further to RM502.4bn (2011: 456.1bn), with domestic debt accounts for 96.5% of the total debt. External debt is projected to decline further to RM17.6bn in 2012 (2011: RM18.1bn). The external debt level has declined significantly from the peak of RM40.2bn in 2003.

Imputing from the projected fiscal deficit level and Budget measures, it is likely that Government debt level will hit the self-imposed limit of 55% of GDP by end-2013. We believe this will make an imminent case for GST implementation for 2014.

Source: Hong Leong Investment Bank Research - 1 Oct 2012