In BUDGET 2018, the government is putting focus on the rising living cost and on assisting the lower and middle income groups to reduce the income distribution gap.
The government has revised upwards the growth for the Malaysian economy to 5.2%- 5.7% in 2017 from 4.3%-4.8%, given the robust economic activity in the first half of 2017. For 2018, the economic activity is expected to moderate to around 5%-5.5% growth.
One of the biggest challenges the federal government faced in tabling the 2018 budget is to maintain fiscal discipline in order to achieve a balanced budget target by 2020.
Notably, Malaysia’s fiscal deficit is expected to shrink to -2.8% in 2018 from the -3% in 2017 on the back of improving projected revenue (+6.4%) for 2018.
Malaysia’s total expenditure is estimated to increase to RM280.25 billion in 2018, with 84% of the amount to be allocated to operating expenditure, while the remaining 16% to development expenditure.
The projections are made with the assumption of crude oil price averaging US$52 (RM218.40) per barrel in 2018.
As such, we might see a wider budget deficit should the oil price fall below the government’s assumption. With the current stabilisation in crude oil price and the expectation that OPEC might extend the production cut beyond March 2018, we opined the government forecast is likely to be achieved.
The main surprise in Budget 2018 was the cut in personal income tax. The reduction of personal income tax is likely to benefit the lower and middle- income group directly, compared to a cut in the Goods and Services Tax, which might be beneficial to the higher income group or wealthy people due to their higher spending power.
As such, the consumer confidence level, as represented by the Malaysian Institute of Economic Research’s Consumer Sentiment Index is likely to trend higher by the end of 2017, and the overall consumer sector might have a positive spillover effect, although it will be tough to identify which specific subsector within the consumer industry will be the biggest beneficiary.
Apart from the consumer sector, the banking sector would also be one of the beneficiaries due to the improving household spending power.
The positive impetus on the consumer spending might further drive the recovering loan demand (+3.6% year-to-date) for big-ticket items and allow banks to garner more interest income further down the road.
Unsurprisingly, according to CIMB Research, the government allocated RM210 billion for infrastructure and housing projects in Budget 2018, which was significantly higher than the RM99 billion in Budget 2017.
However, the majority of projects mentioned, such as the East Coast Rail Link, Kuala Lumpur-Singapore high-speed rail and so on, are not new.
As such, this would mean we might not be able to see a strong catalyst to the construction sector as most of the positive impacts might have factored into the shares’ prices, given the strong rally in the construction sector thus far.
There were several surprises in Budget 2018 such as the plan to build 14 sports complexes in the country, building of new hospitals, the RM2.7 billion allocations for water infrastructure, the proposed upgrading of international airports (Penang, Langkawi and Kota Baru) and so on.
Although these projects are not considered as mega infrastructure projects, it reaffirmed the government’s commitment and emphasis on projects that are able to drive economic growth.
As such, there is still a mildly positive effect to the construction players.
The tourism sector will benefit from several budget incentives, such as the expansion of the e-visa scheme, extension of income tax exemption for tour operating companies, the RM2 billion allocation to small and medium enterprises tourism fund and the RM1 billion fund to the Tourism Infrastructure Development Fund (in the form of soft loan).
The government targets to welcome 28 million tourists in 2018 compared to 26.8 million in 2016, as Malaysia will launch the “Visit Malaysia Year 2020” campaign to encourage tourist arrivals.
Since the main focus of Budget 2018 is to maintain fiscal discipline and address current socio-economic issues (such as equality, increasing cost of living and affordable housing), we do not foresee a material impact on the local equity market.
We think economic activity is likely to continue its momentum moving into 2018, underpinned by encouraging domestic consumption, given the several incentives proposed in Budget 2018.