Putting to test Anwar administration’s reform credentials

by RHB RESEARCH / pic BERNAMA

NEARLY a year on from the 15th General Elections (GE15), we believe the unity government [helmed by Prime Minister Datuk Seri Anwar Ibrahim] has sufficient political capital to take some tough decisions needed to improve its fiscal profile, given an uncomfortable debt-to-GDP ratio.

The elephants in the room: The subsidy bill and return of the Goods and Services Tax (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.

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 capital expenditure 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 electric vehicle (EV) charging infrastructure, locally assembled EV incentives, and EV road tax reform.

Key drivers for equities going forward include developments in the global macroeconomic outlook, direction of US monetary policy, China’s recovery pace, ringgit/US dollar 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 FTSE Bursa Malaysia KLCI target remains at 1,500pts.