CIMB Fixed Income Updates 29 Jan 2016 - Budget recalibrated/Maintaining supply outlook

Malaysia’s Budget 2016 recalibrated

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• The Prime Minister yesterday presented a revised fiscal budget for 2016 as it faced challenges of weak global growth, pressure on the Ringgit, and slump in crude oil prices. The major feature of the revised budget encompassing impact on revenue is assumption of crude oil price (Brent) at $30-35 per barrel. However, the 2016 GDP growth projection is brought down to a range of 4.0-4.5% from 4-5% previously. The PM said the government will keep up with fiscal consolidation measures for 2016, which is to hit its 3.1% of GDP fiscal deficit target, adding that country's debt will be reduced and will not exceed 55% of the GDP. The government will also maintain the 6% GST rate.
• We view the recent budget recalibration positively as it tries to balance the need to tighten spending and still be able to act counter-cyclically to prevent a sharper economic slowdown. The government realistically assumes a bigger shortfall to incorporate the need for relief measures for rakyat to support growth and did not again, for second consecutive year, attempt to cut back devex as significantly as it always did in the past whenever faced with an unexpected revenue shortfall or increase in spending. The pro-growth measures support our economist’s GDP growth projection of 4.6% this year.
• We view the recalibrated Budget having little impact on Ringgit bond market trading sentiment. Based on numbers presented at the initial 2016 Budget presentation back in Oct last year, the 3.1% deficit was equivalent to an overall deficit (revenue minus expenditure) of RM38.8 billion. After the recalibrated budget announcement, the deficit target is maintained at 3.1% though the difference is the 2016 GDP target range has been cut to 4.0-4.5%. We maintain our current estimated gross domestic government bond offerings of RM87.0-87.5 billion in 2016, assuming little change in estimated fiscal financing of up to RM38.8 billion and refinancing of RM48.1 billion of maturing MGS and GIIs this year.