FW: CIMB Thematic Fixed Income Outlook 30 Oct 2017 - Malaysia’s Budget 2018

 

 

RATIONALE SUMMARY

• The government foresees stronger GDP growth in 2017, projecting a range of 5.2-5.7%, and to continue the strong momentum of 5.0-5.5% in 2018. In comparison, growth was 4.2% in 2016. The risk on growth remains slanted towards the external sector. Though exports and imports will show tremendous growth in 2017 the pace in 2018 is expected to slow remarkably. External risks include rising protectionism and policy uncertainties in developed economies and financial market volatility.
• The federal government remains on course in its fiscal consolidation drive in 2017 and 2018, with the fiscal deficit expected to hit 3.0% of GDP in 2017 and lower at 2.8% of GDP in 2018. The drive for fiscal health is the more commendable in view of upcoming general elections before August 2018. Increased discipline in government's expenditure and measures to enhance revenue, contributed to the continued consolidation in fiscal position.
• Few supply concerns rest of 2017. Achieving the 3.0% to GDP fiscal deficit target in 2017 alleviates supply pressures the rest of this year. A 3.0% deficit equates to RM39.9b in required fiscal deficit financing. The Economic Report 2017/2018 showed that gross domestic borrowings in 2017 comprising MGS+GII will surmount to RM107.5b. YTD, MGS+GII offering has come up to RM93.5b. The difference (RM107.5b-RM93.5b) equates to RM14.0b, which will be pretty light for the remaining five MGS+GII auctions the rest of 2017
• As for 2018, based on the targeted 2.8% fiscal deficit and GDP growth of 5.0-5.5%, fiscal deficit financing is expected to touch RM39.8b. From present data, maturing MGS+GII in 2018 is another hefty RM66.8b. Hence, we think total MGS+GII offerings in 2018 will be almost equal to 2017's at RM106.5-107.0b. We opine supply absorption is not an issue in 2018. Continued hefty supply of MGS+GII in 2018 and aversion against EM bonds, Malaysian bond yields would show an upward trend.
• However, there is a saving grace in the form ofwe are comforted by expected Bank Negara MalaysiaBNM's expected interest rate policy direction, which we think will show a consistent OPR level of 3.00% throughout 2018 apart from the demonstration of relative historical stability, although there is the risk that rising growth and inflation may weigh more heavily in the policy decision. Thus, we expect a measure of yield curve steepening in 2018 (as rise in short dated yields are limited). In our opinion, players should focus on shortening the duration of their MGS+GII holdings early in 2018, and lengthening duration in step as longer tenor yields rise.

Best Regards,

CIMB Treasury & Markets Research-Fixed Income
Tel: +603 2261 8557 | Fax: +603 2261 8705
www.cimb.com
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