MAL: Economic Update - Budget 2015 in review – boosting economic resilience

	20 January 2015 Malaysia
Economic Update  |  PDF
Budget 2015 in review – boosting economic resilience
Author(s): Julia GOH +60 (3) 2261 9097, Jarratt MA
▊ The government announced new growth and fiscal deficit targets for this year, budget cuts to operating expenditure as well as various stimulus measures to bolster the resilience of the economy amid the steep fall in oil prices, volatile capital flows and fragile global outlook. Real GDP growth outlook was revised down to 4.5-5.5% (vs. 5.0-6.0% previously). The fiscal deficit target was lowered to -3.2% of GDP (vs. -3.0% under Budget 2015), while reaffirming that fiscal consolidation efforts remain on track. The revised deficit targets were no surprise as we expected the government to manage the deficit within a tight range through various means of revenue enhancements and expenditure cuts. The government’s proactive measures will help to allay some fears, though we expect the overall market sentiment to remain cautious.   What happened The government announced new growth and fiscal deficit targets based on a lower Brent oil price assumption of US$55 (vs. US$100 in Budget 2015). The government guided for a lower growth of 4.5-5.5%, compared to 5.0-6.0% previously. The government remains on a fiscal consolidation path despite a revised fiscal deficit target of 3.2% of GDP (vs. original target of -3% and estimated -3.5% in 2014). Based on the new oil price assumption, the revenue shortfall is RM13.8bn though with higher contributions from GST and GLC/GLIC dividends, the overall drop in revenue is RM12.3bn. We gather that Petronas's dividend contributions were likely to be maintained at around RM27bn given that Petronas recorded a net profit of RM55bn in 9M14 (vs. RM53bn in 9M13). Operating expenditure will be cut by RM5.5bn, encompassing supplies and services such as overseas travels, events and functions, and use of professional services of RM1.6bn, deferment of 2015 Khidmat Negara or National Service to save RM0.4bn, review of transfers and grants worth RM3.2bn, and reschedule of non-critical asset purchases such as office equipment, software and vehicles worth RM0.3bn. Development expenditure will be kept at RM48.5bn 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. What we think The announcements were largely in line with our expectations as we had always known that the government had policy space to manoeuvre. Our initial analysis flagged risks of fiscal slippage [PDF] but we felt that the government will best manage these risks in view of the financial implications and impact on the ringgit. While we concur that a current account surplus is still achievable this year, albeit narrower at around 3% of GDP, there are risks particularly if CPO and LNG prices retrace downwards from 2Q15 onwards. The degree of compression of the current account surplus lies in the exports of crude palm oil and LNG which account for a larger share of 74-88% of Malaysia’s trade surplus. There are potential risks to financial stability if oil prices sustain at low levels and the risks become material if they breed contagion. However, we think that Malaysia is in a fundamentally stronger position to manage the contagion risks and direct spill-overs to the real economy.           |           | Previous "Economic Update" reports... 20/1/15  CHN:  Slower, as expected 15/1/15  AU:  Australian labour force, Dec14 13/1/15  CHN:  Better external demand to cushion domestic slowdown