Wednesday, August 23, 2017

FW: CIMB Thematic Fixed Income Outlook 23 Aug 2017 - Malaysia’s Sovereign Balance Sheet Improves Further; Positive For Bonds


Malaysia's Sovereign Balance Sheet Improves Further; Positive For Bonds

We are positive on the outlook for Malaysia's fiscal finances this year, and our rough calculations signal to us Malaysia's target of 3.0% of GDP fiscal deficit should be easily achievable or even surpassed. This is backed by recent positive data, allowing us comfort in our assumptions going forward.

Malaysian bonds will continue to be well supported and perform better over the next couple of months, particularly if market focus is brought back towards Malaysia's improving sovereign balance sheet which could become increasingly highlighted as we approach the next Budget announcement (potentially in October 2017). The 10-yr MGS, trading near 4%, appears attractively priced, while the feel-good sentiment in regional bond markets could be collectively extended given dovish remarks from central banks, with recent rhetoric emanating from Thailand, Philippines and Indonesia (Indonesia did a surprise rate cut on 22-August-2017, and could continue to do so over the next couple of months).

Our favorable outlook takes into account the following factors:

  • Malaysia's GDP and government revenues on pace to be stronger than assumed in Budget 2017:
    1. At its most basic, this allows for an increase in the denominator for calculation of fiscal balances over GDP. Holding other variables constant translates into smaller fiscal deficit against GDP this year. To recap, 2Q2017 GDP was +5.8% yoy (against 5.4% consensus and 5.6% in 1Q2017). Our economist's view of 2017 GDP is +5.4% whilst Budget 2017 assumes GDP growth of 4-5%.
    1. Improved performance in economic activity is likely to boost the government's revenue stream (such as via higher tax collection and non-tax income revenue).
    1. Higher-than-anticipated global oil price will lift oil-related revenue. Official oil price forecasts from the relevant national authorities such as the Ministry of Finance were quite conservative at the point of budget setting in 2016. For example, MOF's Economic Report 2016/2017 show the government's assumption of $45 per barrel oil price for 2017 ($40 per barrel under revised Budget 2016).  The gap between previous oil prices and the annualized YTD average should easily exceed 10% and Brent is now above $50, hence oil-related revenues to the government could surprise positively. Even though the oil-related share in Malaysia' total revenue has significantly declined (MOF data show share fell to 14.6% in 2016 from 35.4% in 2010), consistently higher global oil prices compared with the Budget 2017 assumptions would lead to higher-than-expected government revenue.
  • Government expenditure showing signs of slowing down after the surge in 1Q2017. We note the government's net expenditure totaled MYR64.2 billion in 2Q2017, down from MYR 66.9 billion in 1Q2017. We anticipate this to decline further in 3Q-4Q2017 as the government takes action in view of its aim for fiscal consolidation. Even though cutting spending will not be easy, there are a number of ways to do this. This includes reduction under the 'supplies and services' and 'subsidies and social assistance' expenditure. The government could also reduce development expenditure. Under Budget 2017, development expenditure was projected at RM46.0 billion. Data in 1Q2017 shows that development expenditure was RM9.3 billion and estimated to have declined in 2Q2017. This coincides with slower growth in government consumption of 3.3% yoy versus +7.5% yoy in 1Q2017 - these GDP component numbers suggest government stimulus was less needed as private consumption and exports were the major drivers in boosting the better-than-expected 2Q2017 GDP. We can see that the interaction between controlled government spending with revenue is contributing to a declining fiscal deficit in MYR terms YTD.


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