Budget 2019 — less candies for a better future

The recent Budget 2019 showed the govt’s fiscal consolidation plan to restore fiscal discipline


As OF end-October 2018, Bursa Malaysia, as represented by the benchmark FTSE Bursa Malaysia KLCI Index, posted a post-election loss of 8.7%. 

Budget 2019 showed the government’s fiscal consolidation plan to restore fiscal discipline.

Although the budget deficit for 2018 and 2019 has widened, we believe the current one would be more reasonable and achievable.

Although the “big three” credit agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Group — maintained Malaysia’s sovereign rating outlook, the wider fiscal deficit and the higher reliance on oil-related revenue might put downward pressure on Malaysia’s rating outlook.

The negative surprise from Budget 2019 was the gaming tax hike. The hike in the casino duty rate was the largest on record from 25% of gross gaming revenue (GGR) to 35% of GGR.

The last time we saw a casino duty rate hike was in 1998 where the rate was standardised to 25% of GGR from a scale of 22%-25% of GGR.

There are several ways casino operators might prevent steep margin compression, such as cutting the junket commission rates or direct VIP rebate rates.

The introduction of the sugar tax is likely to affect the earnings and revenue of certain consumer stocks, but given most of such products have inelastic demand, we believe the increase in price due to the soda tax would have a minimum impact on demand.

One of the positive surprises from Budget 2019 is the continuation of BSH (Bantuan Sara Hidup), previously known as BR1M (1Malaysia People’s Aid), albeit on a smaller scale.

Other incentives such as petrol and electricity subsidies to certain target groups, as well as the monthly public transport pass and the minimum wage hike are likely to ease cost of living pressure and spur consumer spending moving forward.

Although inflation is expected to pick up next year due to the removal of blanket subsidies on petrol, we believe private consumption is likely to remain robust given the improving sentiment and confidence among consumers.

Private consumption is likely to remain as the main driver for the economy moving forward.

Apart from the increase in Real Property Gains Tax by 5% after the fifth year and the increase of stamp duty for properties priced above RM1 million, the overall measures introduced in Budget 2019 are likely to lend further support to the affordable housing sector.

Af ter recording single-digit gains in 2017, the property sector, as represented by the Bursa Malaysia Property Index, has posted a yearto- date loss of close to 30% as of end-October 2018.

The relatively young population in Malaysia will be a plus to the property developers with affordable housing projects.

The proposed Fiscal Responsibility Act, to prevent uncontrolled spending, and the Government Procurement Act which aims to ensure transparency and open competition via open tender practices and punitive action for any abuse of power, have an important role in driving investor confidence.

Such measures, we believe, will gradually lead to an improvement in economic fundamental and eventually translate into a stronger equity market performance.