CIMB Fixed Income Updates 21 January 2015 - Malaysia revises 2015 growth and fiscal targets

Good morning,

• On Tuesday, 20 January 2015, Malaysia’s Prime Minister announced revisions to 2015 GDP growth and fiscal deficit targets. The already expected announcement with news conference called days earlier, was on the heels of the tumbling global crude oil prices, ensuing weak ringgit and still existing global growth risks. The revisions come with fresh budget cuts but new stimulus measures to counter against the oil price, risk to capital flows and risk to growth. Real GDP growth outlook was revised down to 4.5-5.5% (from 5.0-6.0% previously). The fiscal deficit target was lowered to -3.2% of GDP (-3.0% under Budget 2015), while reaffirming that fiscal consolidation efforts remain on track. The fresh targets are now based on assumption of US$55 per barrel Brent prices against the US$100 per barrel assumption as per Budget 2015.
• Our economists reported that based on the new oil price assumption, the revenue shortfall is RM13.8 billion though with higher contributions from GST and GLC/GLIC dividends, the overall drop in revenue is RM12.3 billion. Petronas's dividend contributions are likely to be maintained at around RM27 billion given that Petronas recorded a net profit of RM55 billion in 9M2014 (RM53 billion 9M2013). Operating expenditure will be cut by RM5.5 billion, encompassing supplies and services such as overseas travels, events and functions, and use of professional services of RM1.6 billion, deferment of 2015 Khidmat Negara or National Service to save RM0.4 billion, review of transfers and grants worth RM3.2 billion, and reschedule of non-critical asset purchases such as office equipment, software and vehicles worth RM0.3 billion. Development expenditure will be kept at RM48.5 billion to ensure growth targets are met and ensure the welfare of the lower income group (40% of households). This includes projects for public housing, flood mitigation, water supply, electricity and public transport infrastructure such as the Pan-Borneo Highway.
• The fiscal deficit target of 3.2% of GDP is calculated to rise to RM37.0 billion in fiscal 2015, against a deficit of RM35.7 billion as per announcement in Budget 2015 (Exhibit 1). The difference means that as a result, we have revised our 2015 government borrowing estimation to RM92 billion. As we mentioned last year on the heels of the 2015 Budget announcement, expected borrowing requirements was RM90 billion assuming fiscal financing of RM35.7 billion and refinancing of maturing MGS+GII of 54.9 billion.
• In addition, the risk is now on Malaysia’s sovereign credit rating – or more less, Fitch’s rating on Malaysia with Moody’s and S&P probably holding on to their A3/A- ratings. After yesterday’s announcement, Fitch said it is more than likely to downgrade Malaysia’s A- sovereign after it conducts an annual review on Malaysia in the first half of 2015. MGS yields rose only marginally on pretty average volume traded after the PM announcement yesterday, but upshot of 20bps along longer tenor (10-year or more) bonds is not out of the question in the short term horizon, in our opinion.