• Prudent budget and fiscal discipline in the face of financial constraints
• Falling tax revenue may restrict public spending in 2019
• Maintain GDP growth forecast at 4.8% in 2018, with a more moderate 4.5% growth in 2019

Executive summary

In our opinion, Budget 2019 which is to be tabled on 2 Nov, will likely be a more contractionary budget with lower public spending and a focus on fiscal consolidation.

For this budget, the government is also expected to set the direction for the future growth of the Malaysian economy, as it further fine-tunes the fiscal reform measures that have been promised in its election manifesto.

In 1H18, the Malaysian economy grew at a slower pace of 5.0% compared to 5.7% in the corresponding period of 2017, due to a moderation in the manufacturing sector coupled with a slowdown in public investments.

The Bantuan Sara Hidup (BSH), previously known as Bantuan Rakyat 1Malaysia (BR1M), will likely be maintained at levels similar to the previous year, but will most probably be pared down in the coming years. However, the government may narrow down its targeted scope to reduce the total allocation to only benefit those in need.

To create new potential revenue streams, the government may consider to introduce new tax structures such as digital tax, inheritance tax, soda tax and capital gains tax.

On the fiscal side, the government will continue to exercise prudence in spending and diversify its sources of revenue. In the coming years, oil-related revenue (2018e: 15.7% of total revenue) will likely be higher as Brent crude oil prices are currently trending up, while corporate income tax (2018e: 30.2% of total revenue) will remain one of the main contributors of government revenue.

Overall, we expect the government to remain on track to reduce the country’s fiscal deficit to 2.8% of GDP this year. However, Malaysia’s fiscal deficit is likely to rise back to 3.0% of GDP in 2019, as the government is now grappling with a number of financial constraints that need to be addressed next year.

Inflation-wise, consumer prices in Malaysia will likely come in higher in the fourth quarter of 2018, given the transition from zero-rated GST to the implementation of SST (YTD-Aug CPI: +1.3%). Full year 2018, we expect CPI to moderate lower at 2.0% (2017: +3.7%).

The Overnight Policy Rate is expected to remain supportive of growth. Therefore, the benchmark interest rate will likely be maintained at 3.25%, but a potential rate cut would be needed if economic conditions were to slow down further.

Finally, we forecast 2019 GDP growth at 4.5% and reiterate our 2018 GDP number of 4.8%, in view of the moderating global growth arising from increasing headwinds such as the US-China trade war, emerging market currency volatility and geopolitical tensions.

Source: Alliance Research - 15 Oct 2018