The broadly anticipated Budget 2018 has finally been unveiled by our Prime Minister and Finance Minister Najib Razak last Friday. The theme of the 2018 budget is “Prospering an Inclusive Economy, Balancing Between Worldly and Hereafter, For The Wellbeing of Rakyat, Towards TN50 Aspirations”, where the government is putting the focus on addressing the rising living cost, especially to assist the lower and middle income groups in order to reduce the income distribution gap. In this article, we will highlight several measures and proposals announced in the latest budget and discuss the possible implications of these proposals on the local economy and the equity market.
Key economic highlight for budget 2018:
Malaysia GDP for 2018: 5.0% - 5.5% (2017: 5.2% - 5.7%)
Government Revenue – RM 239.9b (+6.4%)
Total Expenditure: RM 280.25b (2018) vs RM 260.8b (Proposed during Budget 2017)
Fiscal Deficit -2.8% of GDP for 2018 (on track to achieve the balanced deficit by 2020)
Our government has also revised upwards the growth for Malaysian Economy to 5.2% - 5.7% in 2017 from the previous 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 5.0% to 5.5%.
One of the biggest challenges for the government in tabling the budget 2018 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 -3.0% for 2017 (see figure 1) on the back of improving projected revenue (+6.4%) for 2018. On the expenditure front, Malaysia’s total expenditure is estimated to increase to RM 280.25b in 2018, of which about 84% will be allocated to operating expenditure while the remaining 16% will go to development expenditure. However, all these projections are made with the assumption of US$52 for crude oil prices 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 that the government forecast is likely to be achieved.
|Figure 1: Malaysia's Budget Deficit
- Personal income cut: 2% cut in the RM20,000 to RM70,000 tax income bands
- RM3.9b for goods and transport subsidies including cooking gas, flour, cooking oil, electricity and toll.
- No GST for reading materials, including magazines, comics and journals, from Jan 1, 2018
- Extension of BR1M in 2018; maximum pay-out of RM1,200 each
- Extension of PTPTN until Dec 2018 (20% discount for full settlement, 15% discount for 50% outstanding settlement, 10% through direct debit from salary)
- 12-month income tax exemption for women returning to workforce (after minimum 2-year break)
- Civil servants to get RM1,500 special payment
- Government retirees to receive RM750 special payment each in 2018
- Toll collection on Federal Highway abolished from Jan 2018
As mentioned, since the budget 2018 will be the last budget before GE14, majority of the society might be having a positive expectation on it such as an upward revision of minimum wage, an increase in cash hand-out (BRIM) or a reduction in Good and Services Tax. Disappointingly, we saw no revision being made for minimum wages, BR1M and also the newly implemented GST.
However, the main surprise for the citizens would be the cut in personal income tax. In fact, we saw some credit from the Government’s decision of cutting the personal income tax instead of GST. The reduction of personal income tax is likely to benefit the lower and middle income group directly as compared to a cut in GST, which might be beneficial to the higher income group or wealthy people due to their higher spending power. As such, with the new personal income tax rate, we believe that the wealth distribution gap is likely to be narrowed.
In short, the personal income tax cut together with the special payments to civil servants – one of the biggest winners in Budget 2018, are likely to boosts the local economic activity by lifting the local consumption spending.
Which sectors will benefit?
Consumer sector/ Banking sector
With the several incentives and goodies proposed by the Prime Minister to benefit the people, we believe that it will eventually lead to an increase in average disposable household income for Malaysian. In fact, since the extension of BR1M in 2018 is likely to provide financial aids to the B40 segment while the reduction in personal income tax rate is likely to benefit the M40 group, these two proposals are likely to benefit a broader base on people. As such, the consumer confidence level, as represented by MIER consumer sentiment index (see figure 1) is likely to trend higher by the end of 2017 and the overall consumer sector might have a positive spill-over effects, although it will be tough to identify which specific sub-sector within the consumer industry will be the biggest beneficiary.
|Figure 2: MIER Consumer Sentiment Index
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 (YTD +3.6%) for several purposes especially for the big-ticket items (see figure 3), which will allow banks to garner more interest income further down the road.
|Figure 3: Loan applied growth (YoY, %)
Unsurprisingly, according to CIMB research, government allocated RM 210 billion for infrastructure & housing projects in Budget 2018, which is significantly higher than the RM 99 billion in budget 2017. However, majority of the projects mentioned are not the new one such as, East Coast Rail Link, KL-Singapore High Speed Rail and so on. As such, this would mean that we might not be able to see a strong catalyst to the construction sector as most these positive impacts might have factored into the shares’ prices given the strong rally in the construction sector thus far.
Nevertheless, there were several surprises such as building 14 sports complex in the country, building new hospital, the RM2.7 billion allocation for water infrastructure, upgrading of international airports (Penang, Langkawi and Kota Baru) and so on. Although these surprises are not considered as mega infrastructure projects, it reaffirmed the government’s commitment and emphasis on projects that are able to drive our country economic growth. As such, there is still a mildly positive effect to the construction players.
Tourism and Healthcare
Apart from the few sectors mentioned above, we believe that tourism sector also poises to benefit from the budget 2018 given the several budget incentives, such as the expansion of E-visa scheme, extension of income tax exemption for tour operating companies, RM 2b of allocation to tourism SME fund and the RM 1b of fund to Tourism Infrastructure Development Fund in the form of soft loan. On top pf that, our government also targets to welcome 28m tourists in 2018 compared to the 26.8m in 2016 (see figure 4) as Malaysia will launch the “Visit Malaysia Year 2020” campaign to encourage tourist arrivals. Historically, we have seen spikes in tourist arrivals and receipts to Malaysia during “Visit Malaysia Year”. As such, sectors such as Tourism, Aviation and the Entertainment and Hotel Operators are likely be the direct beneficiaries given the several measures and the launch of Visit Malaysia Year 2020.
|Figure 4: Tourist arrivals and receipts to Malaysia
All in all, since there is not much surprise from the Budget 2018, with the main focus on maintaining fiscal discipline, addressing current socio-economic issues (such as the equality, increasing cost of living, and affordable housing), we do not foresee a material impact on the local equity market. However, we think that the economic activity is likely to continue its momentum moving into 2018, underpinned by encouraging domestic consumption given the several incentives proposed by the Prime Minister in Budget 2018.
Given the Consumer Product industry turned out to be the biggest beneficiaries in Budget 2018, investors can look at KAF Tactical Fund or PMB Shariah Aggressive Fund which have exposures into consumer product industry of about 18% and 20% of the total portfolio allocation respectively. However, given both the funds are associated with higher risk, investors should keep their exposure in the fund with not more than 10% allocation of their overall portfolios.