• Budget consolidation and prudent spending stance is maintained

• Higher budget allocation of RM314.5bn in Budget 2019

• We maintain a more conservative GDP growth forecast of 4.5% vs +4.9% under the Budget

Budget 2019 highlights

In the Economic Report 2018/2019, Malaysia’s economy is forecast to expand at 4.9% in 2019, slightly higher than 4.8% in 2018. Nevertheless, domestic demand will likely remain as the main driver of growth.

The government will continue to exercise prudent spending in 2019, with the fiscal deficit targeted to decrease to 3.4% of GDP in 2019 (2018e: 3.7%).

In fact, federal government revenue and operating expenditure are expected to increase by 10.7% and 10.4% respectively, while development expenditure is projected to contract by 0.4% in 2019.

On the supply side, the government expects broad-based growth from all subsectors, with services, construction and manufacturing sectors contributing the bulk of the GDP growth. Private consumption is expected to grow by 6.8% in 2019, supported by increase in income as labour market condition stabilises amid benign inflationary pressures.

External demand remains resilient, as gross exports continue to grow by 3.9% to RM1.01tr in 2019 (2018e: +4.4%). In line with stronger domestic consumption, gross imports are also expected to expand by 4.1% to RM905.1bn (2018e: +4.4%).

Inflation is forecast to remain manageable at 2.5%-3.5% in 2019 (2018e: 1.5%-2.5%).

Our View: Overall, Budget 2019 was a surprise, as we were expecting a ‘sacrificial’ Budget, but what turned out is yet another expansionary Budget. We are encouraged to see several measures to support private consumption growth while maintaining fiscal prudence.Overall, Budget 2019 will set aside RM314.5bn in expenditure (Budget 2018: RM290.4bn)

The slight drop in revenue (excluding one-off special dividend from PETRONAS) was expected as the re-implementation of SST to replace GST has led to lower tax collections.

However, the bulk of revenue remains supported by corporate tax collections (26.8% of total revenue) and personal income tax collection (13.4% of total revenue). As expected, the government will implement new taxes (digital tax, real property gains tax, sugar tax and tourism tax) as new sources of revenue stream in 2019.

The fiscal deficit target of 3.4% in 2019 was within our expectations, as the government remains firm on its commitment to repay the outstanding tax refunds amounting to RM37bn in the upcoming year.

Development expenditure for 2019 is RM54.7bn (2018e: RM54.9bn). However, we believe the government can cut the expenditure in order to meet fiscal obligations if need be.

At our end, we are cautiously optimistic and thus, maintain our 2019 GDP growth forecast at 4.5% (2018e: 4.8%), and inflation at 2.5% (2018e: 1.1%). On the Overnight Policy Rate, we believe that Bank Negara will maintain it at 3.25% until at least mid-2019.

Source: Alliance Research - 2 Nov 2018