• Another year, another balancing act. With public finances tight amid a narrow revenue base, a key focus of Budget 2024 will be on options to broaden income sources and rationalise subsidies whilst retaining initiatives to support the lower income groups. The 12th Malaysia Plan (12MP) MidTerm Review (MTR) spending targets indicate development expenditure of MYR90bn. RHB Economics projects a 2024 fiscal deficit of 4.5% of GDP (2023F: 5%). We expect the budget to lay the ground for meaningful fiscal reforms ahead. The impact on the consumer sector is net neutral at best.

• The Anwar Administration’s reform credentials to be put to the test. Nearly a year on from the 15th General Elections (GE15), we believe the unity government has sufficient political capital to take some tough decisions needed to improve its fiscal profile, given an uncomfortable debtto-GDP ratio. The elephants in the room: The subsidy bill and return of the GST. Various media reports quoting Economy Minister Rafizi Ramli suggests a targeted subsidy programme could be introduced by early 2024 – predicated on the scheduled November launch of the Pangkalan Data Utama (PADU) socio-economic database – that could begin with diesel and electricity before being expanded to RON95 petrol. We believe GST will only make a comeback further out, depending on political will – its reintroduction in Budget 2024 looks unlikely. Other potential new taxes that could be introduced include the capital gains and luxury taxes first mooted in Budget 2023.

• Moving up the value chain. Moves to elevate Malaysia Inc up the value chain will feature, in our view, and we expect Budget 2024 to focus on matching grants and investment tax allowances to encourage more inbound foreign direct investment or FDI flows. The development of digital- and technology-based industries and accelerating public sector technology adoption may entail additional capex spending on IT infrastructure, including emphasis on cybersecurity, data management, and training and productivity related initiatives. Elsewhere, new gaming taxes look remote, though we are unable to rule out higher excise duties on tobacco and brewery – although these will require a step-up in enforcement initiatives. No major measures related to the property sector are anticipated. The auto sector could see incentives related to EV charging infrastructure, locally assembled EV incentives, and EV road tax reform.

• Strategy. Key drivers for equities going forward include developments in the global macroeconomic outlook, direction of US monetary policy, China’s recovery pace, MYR/USD performance, continued stability of the Federal Government, and propensity to introduce politically sustainable fiscal reforms. At 14.5x FY24 P/E, valuations are undemanding, though fragile corporate earnings could limit the fundamental upside. A core defensive stance is still preferred, and market weakness should be seen as opportunities to gradually deploy cash hoards to add to equity positions. Our end-2023 FBM KLCI target remains at 1,500pts.

Source: RHB Securities Research - 27 Sept 2023