KUCHING: Analysts atAllianceDBS Research SdnBhd (AllianceDBS) believe Budget 2015 will hold no major surprises and it will be pro-rakyat and business-friendly, without risking sovereign rating confidence of the economy.
In a report yesterday, the research team said it expected no surprises on the expenditure front, in particular development expenditure.
With Malaysia aiming to become a high-income nation by 2020 with a US$15,000 gross national income per capita target (2013 at US$10,400), the firm believed Budget 2015 will play its part in formulating a consistent and sustainable policy framework towards reaching this goal.
“We can expect the budget to address rising cost of living and issues pertaining to affordable housing and urban living. The government policies are expected to strengthen economic fundamentals in the short to medium term, which will benefit low and middle-income groups, small and medium enterprise (SME) and key industries,” the research team further said.
On the private sector front, it believed the government would maintain its focus on growth policies by ensuring private investment as an integral part of the economy.
“While private investment – both domestic and foreign – contributed 16.7 per cent to gross domestic product (GDP) in 2013, the composition of gross private investment to economic output was much higher at around 25 per cent in the 1990s,” it said.
AllianceDBS Research explained, “Given the array of high impact investment led projects such as the Mass Rapid Transit (MRT) construction and Refinery and Petrochemical Integrated Development (Rapid), we believe that the government will further explore and enhance its framework for private-public business venture model.”
It added, the public-private partnership project cooperation would be able to kickstart and sustain big projects that would bring about favourable multiplier effect to the economy.
Meanwhile, it expected more public investment in infrastructure spending, including construction of roads, expressways as well as schools and higher institutes of learning.
“The government will continue to encourage investments into the five regional economic corridors by providing basic infrastructure and implementing high impact projects,” it opined.
Within the budgetary constraints, AllianceDBS Research pointed out that there are inherently two major challenges to be addressed which are fiscal deficit and government debt to GDP ratio as these are the current and foreseeable macroeconomic challenges in the midst of Budget 2015 roll out.
“As the government has committed to a three per cent budget deficit for Budget 2015 and a balanced budget by 2020, we expect responsible fiscal measures to consolidate government expenditure and diversify revenue.
For 2014, we are confident the deficit target of 3.5 per cent from last budget is attainable, given the government’s initiatives to trim subsidies,” it said.
Meanwhile, AllianceDBS Research expected a revamp in fuel subsidy mechanism in short to medium term. This revamp, it said, should be aimed at plugging leakages of blanket fuel subsidy in favour of a more targeted subsidy to the lower-income group.
Furthermore, another point of concern for Budget 2015 formulation is the issue of government debt, the research team said.
“With government debt to GDP ratio at 54.7 per cent in 2013 (although moderated to 52.7 per cent in 1H14), the debt level is uncomfortably near the 55 per cent self-imposed ceiling level,” it noted.
Aside from that, in 2015, the research team expect the government to face a handful of macroeconomic challenges, including rising cost of living, declining housing affordability among lower income group and first-time home buyers.
“With 2014 inflation expected to stay above its long-run average of 2.2 per cent, we do not expect the price pressures to subside soon given the impending implementation of Goods and Services Taxes (GST) in April 2015,” it said, noting that inflation rate is expected to be at four per cent in 2015, which would drag domestic spending.
“Measures to alleviate the economic welfare of the lower-income group would be a welcomed initiative by the rakyat.
“The government has promised that Bantuan Rakyat 1Malaysia (BR1M) assistance will continue and its cash hand-out amount will be increased,” AllianceDBS Research commented.
On the implementation of GST next year, the research team expected further details on the classification of supplies to be either GST exempted or zero-rated to be announced during the budget.
On a sector by sector outlook, AllianceDBS Research in a separate report, highlighted, investment driven sectors like construction and oil and gas (O&G) are expected continue to be positive. However, it noted, the consumer sector and gaming sectors could be hit by the coming tax hike.
It added, besides the negative impact from inflation-induced consumption slump, the consumer sector might also be hit by sin tax hikes on tobacco and brewery sub-sectors as the government seeks to raise revenue.
It added, while it generally expects the gaming sector to be spared from tax hikes, it could also be hit if the government raises gaming tax after a long hiatus for domestic gaming operators.
With the government’s continued commitment towards Economic Transformation Programme (ETP), construction and oil and gas (O&G) sectors are expected to continue to benefit from investment driven demand, AllianceDBS Research pointed out.
“As fuel subsidy accounts for the largest portion of the government’s subsidy bill, rationalisation will indirectly benefit Tenaga Nasional as the government implements incentive based regulated return with full fuel cost pass through.
“This will provide improved earnings and cash flow visibility for Tenaga going forward. Meanwhile, Petronas Gas will benefit from growing gas volume from LNG,” it explained.
For the construction and property sectors, it noted, the slowdown in the property sector has been increasingly evident following the imposition of lending restrictions to curb excessive speculation.
However, housing affordability among the lower income group and first time home buyers remain low, it added.
“Therefore, any government incentives to promote first time home ownership will benefit developers such as MKH which focus more on affordable housing,” AllianceDBS Research said.
Overall, the research team opined Budget 2015 would likely continue along with the federal government’s fiscal reform agenda to reduce subsidies, widen revenue sources through GST and promote growth via investment in catalytic mega projects.