Clarity on fiscal strategy post-elections needed

The market will need time to ‘recuperate’ from Budget 2022 measures 


A CLEAR strategy on shore up government finances possibly after the 15th General Election (GE15) could set the stage for the economy, investors and local equity market to make sustainable gains after the disappointing years due to the Covid-19 pandemic and political instability. 

Maybank Investment Bank Bhd (Maybank IB) head of regional equity research Anand Pathmakanthan said the implementation of Cukai Makmur is a one-off measure and investors still need to be convinced of measures from the federal government to expand fiscal revenue in the medium term. 

He does not expect Putrajaya to re-implement the Goods and Services Tax taking into account the possibility of GE15 being held earlier. 

“The market will need time to ‘recuperate’ from Budget 2022 measures that are resulting in a GDP divergent year-on-year earnings contraction for the FTSE Bursa Malaysia KLCI (FBM KLCI), its’ fourth in five years. 

“Given multiple risks such as more corporate levies to bridge fiscal gaps, loan moratorium expiry, policy and political risk in the run-up to GE15, traction is only expected in the second half of 2022 (2H22) when the 2023 estimated earnings rebound is in sight,” he said during the Maybank IB Asean Macro and Malaysia Market Outlook 2022 webinar yesterday. 

As such, he emphasised Malaysia needs to get the GE15 out of the way to address fiscal constraints, as this could put the country in a better position, which in turn would bode well for a local equity market recovery. 

Anand forecast the benchmark FBM KLCI would be at 1,710 points by the end of this year in anticipation of corporate earnings improving in 2023. 

Maybank IB’s regional co-head of macro research Dr Chua Hak Bin said the risk of movement restrictions and disruption would be lower in 2022 than 2021, as Asean has adopted a “living with Covid19” strategy as well as the new endemic norms. 

He said the GDP of the six Asean countries is expected to grow 5.4% in 2022 and 4.8% in 2023, after slowing down to 3.8% in 2021. 

In fact, Chua believes Asean GDP growth would surpass China for the first time in 30 years in 2022. 

“It was reported that all six Asean countries will have 70% of their population vaccinated by April 2022. 

“The full reopening of the economy and the implementation of vaccinations, particularly booster doses will drive Asean’s growth in 2022 and moving forward,” he noted. 

The investment bank believes the floods that hit part of Malaysia in December and this month will not affect the country’s GDP growth or economic recovery. 

Its chief analyst Suhaimi Ilias maintained a GDP growth target of 6% for 2022 despite the damage caused by the floods. 

He said based on the feedback from industry players, the impact of the floods that hit several states was under control and there was no sign it could cause prolonged disruptions in terms of supply shortage. 

“The flooding certainly looks severe but the message we get from the industry is that the situation is manageable and there is no indication it is going to be a major disruption to manufacturing activities. 

“In fact, the plantation industries also only saw a minimal impact from the floods,” he said. 

Suhaimi added the insurance industry estimated claims related to flood damage is around RM3 billion while damages to households which are likely not insured is around RM1.5 billion based on figures provided by the government. 

He noted the impact from the floods should be neutralised over the longer term and the progress may be more positive moving forward. 

Suhaimi expects Bank Negara Malaysia (BNM) is likely to raise the Overnight Policy Rate (OPR) towards the year-end amid expectations inflationary pressure will pick up despite the risks of Omicron weighing on growth. 

Maybank IB expects BNM to raise the OPR by 25 basis points to 2% by the fourth quarter of the year from the current 1.75%. 

Headline inflation is expected to climb to 2.5% in 2022 mostly influenced by price movements of fuel and food imports. 

He added the investment bank believes a high vaccination rate and the sharp decline in fatality rate is set to put the economy on a recovery track, with private consumption expected to rebound and increase demand for commodities and energy. 

“Among conditions for BNM to start considering raising the OPR is the output gap. I think the output gap is still negative and only expected to zero-rise after the 2H22 and that’s when BNM will start looking to kick start its interest rates hike cycle. The negative output gap also means the risk of demand-fuelled inflation is still fairly contained,” he said. 

Suhaimi said the Omicron still poses a downside risk to growth but the sharp decline in deaths suggests vaccination and strict containment measures had been effective. He added this makes the prospect for lockdowns more unlikely. 

Maybank IB head of foreign exchange research and strategy for global markets Saktiandi Supaat expects the ringgit to strengthen in 2022 and end the year at RM4.10 against the US dollar. 

The investment bank has a positive outlook on the ringgit beginning in mid-2022 with support largely coming from external factors such as the global economic recovery, a moderately weak US dollar environment, oil prices and yuan stability. 

“Domestic factors like the move towards the endemic phase following significant advances in terms of the vaccination will support the ringgit,” he said. 

The FBM KLCI closed seven points lower at 1541.9 points yesterday while the ringgit fell by 150 points to 4.1850 against the greenback.