Ahead of the Malaysia Budget 2022 that will be tabled today at 4pm, Macquarie Equities Research (MQ Research) expects that the government will narrow the FY22 budget deficit to 4-4.5% and it will be a people-friendly budget that will focus on living cost, healthcare as well as support on employment and small businesses, among others. It also thinks that Budget 2022 is an opportunity for the government to build support with a general election potentially happening next year. While MQ Research has low expectations on mega-infra projects in Budget 2022, it views that this could be positive for the construction sector. Read more for an excerpt of MQ Research’s report dated 28 October 2021 to find out further preview of the Budget 2022.

Sufficient breathing room for fiscal consolidation

• MQ Research expects the government will uphold the Medium-Term Fiscal Framework (MTFF) objectives and narrow the budget deficit to 4-4.5% for FY22. This is crucial for the government’s fiscal-discipline credibility; Malaysia’s sovereign rating is now BBB+ (Fitch). MQ Research FY22 gross domestic product (GDP) growth estimate of 6-7% in FY22E (albeit, off a low base) provides ample headroom for the MTFF; MQ Research is optimistic that Malaysia’s successful vaccination program and ample healthcare capacity will prevent the need for widespread lockdowns in FY22.

• Elevated commodity prices a shot in the arm.  MQ Research is bullish on oil with a US$62.75/bbl FY22E target vs MTFF assumptions of US$45-55/bbl; petroleum revenues will make up >16% of fiscal revenues in 2021. The rally in crude palm oil (CPO) prices to >RM5,000/mt is another boost for GDP; MQ Research sees it making up ~4-5% of GDP in 2021E; MQ Research estimates RM3,000/mt CPO in FY22E.

A Pre-election Budget: People First

• With a general election potentially being held as early as 2H22, Budget 2022 is an opportunity for the government to build support. Healthcare and subsidies topped Malaysians’ wishlists for Budget 2022 in MQ Research’s proprietary survey last month. Paired with a spike in food inflation, to which low-income groups are especially sensitive, MQ Research thinks Budget 2022 will have to place heavy emphasis on managing cost-of-living concerns. Fortunately, Malaysia’s natural hedge of oil prices should blunt the bulk of the energy price inflation. Managing food inflation should be the main focus of government subsidies.

• MQ Research thinks businesses, especially small & medium enterprises (SME’s) need substantial help getting back on their feet following economic reopening. MQ Research expects to see a combination of grants, tax breaks and incentives, likely skewed to pandemic-hit sectors like tourism.

• In turn, MQ Research thinks mega-infrastructure projects should take a backseat in Budget 2022. Such development expenditure may have a better long term multiplier effect, but it does not help win elections in the short term, especially if the projects are still under construction when polls open. MQ Research’s survey corroborates this view.

The Risk of Robin Hood

• MQ Research worries that the government will seek to boost tax revenues. Earlier this week, Dewan Negara passed the Windfall Profit Levy Bill 2020. Sectors booking super-normal profits could be at risk: e.g. gloves and oil and gas. Wealth/estate taxes and higher individual income taxes for high-income groups could also feature.

• Policy risk sectors: banks, utilities, toll roads, retail fuel, and food producers.

• Opportunities: Construction, if infrastructure spend surprises on the upside.

Source: Macquarie Research - 29 Oct 2021