Prime Minister Datuk Seri Najib Tun Razak, who is also the Finance Minister, announced a “people friendly” budget on October 10 which to a large extent catered to the aspirations of many a Malaysian.
Apart from providing for the individual, Najib’s Budget 2015 also proffered measures to improve the fiscal landscape of the nation which is a major concern of every national budget.
As a move to promote investment and economic development, Budget 2015 outlined several measures and projects that will be implemented.
For East Malaysia, one of the biggest allocation for projects is the 1,663km Pan-Borneo Highway comprising 936km of road upgrading works in Sarawak and 727km in Sabah at a total cost of RM27 billion.
Works Minister Datuk Seri Fadillah Yusof reportedly said: “The government intends to fast-track the upgrading work of the Pan-Borneo Highway through the Public-Private Partnership Unit (UKAS) of the Prime Minister’s Office while the Works Ministry, would act as technical advisor and project manager.”
Besides that, Najib in his budget speech also announced a sum of RM4.5 billion for the upgrading of rural facilities and infrastructure.
He mentioned funds will be for construction of 635km of rural roads including former logging roads in Sabah and Sarawak with an allocation of RM943 million, provision of electricity for 15,000 houses with an allocation of RM1.1 billion and implementation of rural clean water supply for 7,500 households with an allocation of RM394 million.
Moreover, he said among others the funds will also be used to build and rehabilitate dilapidated houses involving 9,500 units with an allocation of RM200 million and an effort to increase the quality of rural air services in Sabah and Sarawak through maintenance and lease of new aircraft with an allocation of RM160 million.
Meanwhile, other projects and initiatives include the construction of a health clinic at Lubok Antu and the first of its kind hill paddy subsidy of RM70 million to assist farmers in Sabah and Sarawak. This covers an expanse of 76,000 hectares of crop area to strengthen the food supply chain.
The measures are expected to boost the agriculture sector as well as improve the standard of living of the people in the rural areas with better healthcare, infrastructure and facilities as well as transportation.
Other than that, the government has allocated RM262 million to finance the cost of transportation and the enforcement of price control on essential goods especially in Sabah and Sarawak which will be implemented by the Ministry of Domestic Trade, Co-operatives and Consumerism.
With the implementation of the Goods and Services Tax (GST) next year, prices of goods and services are expected to spike up to a new high.
While the rakyat will no doubt grapple with higher cost of living as a result of the implementation of GST next year, are businesses throughout the state ready for the implementation, especially when the majority of them are small and medium enterprises (SMEs)?
The GST & taxation housekeeping
KPMG Partners Sdn Bhd Kuching (KPMG) executive director Regina Lau says: “With barely five months to April 1, 2015, it seems that many businesses, notably SMEs have hardly done much in preparation for the changeover.
“While they have attended GST briefings and road shows, understanding how the tax works is one thing, while getting down to doing what is necessary to prepare for the compliance is another.
“At this late stage, these businesses would find it difficult to engage qualified GST consultants to assist them in the changeover and implementation, apart from incurring costs which are another issue,” she told BizHive Weekly in an e-mail interview.
She noted some businesses are still not very concerned over the new tax regime as they thought that it is a simple matter of just buying or upgrading their computer software to be GST-compliant while others may just want to pass on the tax costs.
Hence, she urged businesses which need to be GST compliant not to delay in gearing up for the GST implementation as the consequences could be costly.
At the same time, Ernst and Young Tax Consultants Sdn Bhd (EY) executive director Koh Siok Kiat concurred with Lau saying that businesses especially SMEs are in for a “crunch time” to prepare for the implementation of the GST.
“While big corporations may be quite prepared to brace up for GST, the worry is for the SMEs which may find it difficult to get professional help at this stage.
“Although the Customs Department is ready to help out, the long waiting line to reach the Custom’s “help desk” is staggering.
“So what happens to businesses which fall outside of these two groups? Perhaps, that’s a concern,” Koh perceived.
In the meantime, EY in its budget commentary and tax information handbook revealed that non-compliance to certain changes of the new tax law by affected parties and failure to submit certain documentations and record-keeping could result in higher penalty charges.
When asked on the role of GST for businesses next year Lau said: “In a consumption tax system, businesses basically act as agents to collect the tax on behalf of the government.
“When the burden of tax collection shifts to businesses, it is important that the businesses are not unduly burdened with high compliance costs,” she said.
She explained that the taxation system should be simple for laymen on the street to understand, administer and for their compliance purposes.
She noted Malaysia’s GST system is modeled along that of a few countries such as Australia, New Zealand, United Kingdom, Canada and Singapore.
She observed Malaysia has not adopted the simplest GST system citing for instance, the country has a long list of exempt supplies items such as items which are GST-free along the whole supply chain.
“When a business makes both taxable supplies and exempt supplies, it becomes a mixed supplier.
“(In this scenario), the partial exemption rules and capital goods adjustment rules which apply to mixed suppliers are complicated and certainly not easy to administer.
“Changeover costs, for instant systems upgrade, staff training and compliance costs such as additional resources, submissions of correct GST returns, risk of penalties on errors in the returns are therefore increased unnecessarily.
“Ideally, to lower compliance costs and minimise issues associated with classification of supplies, a consumption tax system should have as few categories of supplies as possible,” she pointed out.
Nonetheless, Lau noted the government had expanded the list of exempt supplies as evident from the GST Exempt Supply Order which was released shortly after the Budget 2015 announcement in consideration of the feedback and requests from various quarters.
She observed that other than the exempt order, there is also a GST Zero Rated Supply Order and a GST Relief Order.
Therefore, Lau said the more categories of GST supplies there are, the more complex the tax system, and businesses will face greater challenges dealing with its compliance.
Budget 2015 – Quotable Quotes
When asked about any area from Budget 2015 which could be improved, she opined that one area which could have been “more encompassing” is the implementation of the high speed broadband (HSBB) network.
Lau observed during the budget speech, the prime minister had mentioned the implementation of HSBB will continue in areas of high economic impact for instance, state capitals and selected major towns.
“In Sarawak though, many areas especially in the rural and interior are still without Internet connectivity.
“In the sub-urban areas which are connected, the service leaves much to be desired.
“While we expand the coverage areas for HSBB, we should also extend Internet connectivity to areas which are currently not connected and raise the quality of connection in those areas which are already connected,” she opined.
On aspects of Budget 2015 which should have been included, Lau says, Budget 2015 encompassed most concerns of all quarters.
However, she says: “With a wide focus in an attempt to cover all segments of society, we see snippets here and there, which may not actually translate into meaningful measures to assist the people in addressing inflationary concerns.
“The broadening of the income tax band and reduction in individual income tax rate of between one per cent to three per cent is effective on income for the year 2015, which means that the tax reduction does nothing to increase the ‘take home’ income of individuals immediately.
“Those in the middle income category have little to cheer about for Budget 2015,” she said.
As for the restructuring to the individual income tax whereby the chargeable income subject to the maximum rate which will be increased from exceeding RM100,000 to RM400,000, Lau believes that taxpayers who fall in this category will enjoy tax saving on their 2015 income.
“With the increase in the income threshold subject to the maximum tax rate, taxpayers falling in the category will see a tax saving of about 7.8 per cent to 9.4 per cent on their 2015 income.
“The reduction in tax rates for individuals was expected with the introduction of GST.
“While further cuts ought to be considered with the GST which will take effect in about five months’ time, we expect such cuts to be forthcoming once the magnitude of GST’s contribution to the government’s coffers is more certain.
She says, overall Budget 2015, tried to cater for “everyone” with a mix of tax and non-tax measures to drive growth in a more equitable and inclusive manner with a particular focus on empowering productivity and technology.
She noted Budget 2015 provides initiatives to mitigate income inequality and ease inflationary impacts on vulnerable groups to a certain extent while directing resources to productive investments for continued growth in a sustainable way.
As for sectors which are likely to benefit from the budget, Lau noted in particular the construction sector is the direct beneficiary of the budget announcement.
“With the many huge infrastructure projects to be implemented under the measures to accelerate economic growth, the sector that will stand to gain the most from the budget is the construction sector.
“Infrastructure projects ranging from upgrading of railway line to construction of new Mass Rapid Transit (MRT) lines as well as new hospitals and rural infrastructure projects in Sarawak and Sabah will spur the construction sector, bringing with it a chain of economic spin-offs along the supply chain.
“In addition, with the various measures aimed as up-skilling and re-skilling the workforce, those in the educational and training sector will see robust activities,” she observed.
Beneficiaries of Budget 2015
Ironically, one of the beneficiaries of Budget 2015 is the construction sector.
With allocations of billions of ringgit throughout the whole country to build highways and the MRT project, these developments are expected to benefit contractors and construction companies.
For East Malaysia, particularly Sarawak, the upgrading works for the Pan-Borneo highway could potentially be accelerated.
The RM27 billion-highway project is poised to further enhance road accessibility and connectivity for the people in Sarawak and Sabah as well as generate economic development and trade transactions between the two states.
Sarawak’s leading infrastructure facilitator Cahya Mata Sarawak Bhd (CMS) group managing director Datuk Richard Curtis said: “CMS is well-positioned to bid for infrastructure projects as our business is focussed on infrastructure and related services required across Sarawak.
“It has planned for and allocated resources to ensure efficiency and cost effectiveness in the execution of such projects,” he said.
He observed that CMS has invested in a RM190 million cement plant, which will increase its cement production by one million tonnes per annum and about RM12 million in four mobile premix plants.
He added the cement plant is slated to be commissioned in early 2016 and will increase the company’s cement production capacity by 60 per cent to meet the high demand of Sarawak’s robust infrastructural development.
“We continue to believe that CMS is one of the best proxy listed investments for Sarawak’s accelerating economic growth, which will be facilitated by our core values.
“Those values include experienced and professional management team with the right focus, passion and integrity; prudent financial policies to ensure a healthy balance sheet; humble, compliant and an engaged approach to all stakeholders and taking a long term view to ensure sustainable growth,” he noted.
He foresees Sarawak’s infrastructure continues to need significant investment to support its strong growth trajectory fueled by the Sarawak Corridor of Renewable Energy (SCORE) and rural development.
He was glad to know Budget 2015 has put more emphasis on additional major infrastructure projects for Sarawak, including the Pan-Borneo Highway.
“As we advance in realising the state’s vision, we can look forward to continued development, with an impetus on infrastructure, transportation, affordable housing, rural water supplies and price control on essential goods,” he said.
Likewise, others sectors which are going to benefit include shipping, telecommunication and agriculture.
As a measure to promote domestic shipping industry, the government is willing to assist owners of cargo ships with gross tonnage of less than 300 tonnes to obtain third-party liability protection at reasonable premiums.
For the telecommunication sector in Sarawak, Instacom Group Bhd (Instacom) could be among the companies to reap the fruits of getting a slice of the pie to build telecommunications towers.
It recently made known of its intention to participate in bidding for the construction of telecommunication towers in the state.
Instacom group chief executive officer (CEO) Anne Kung said: “In April this year, the Malaysian Communications and Multimedia Commission (MCMC) called for the first tender of 400 towers and Instacom has participated in the tender exercise.
“Of this first phase, Sarawak was given the lion share of 149 towers,” she observed.
She said the results of the tender is expected to be imminent and Instacom is confident it will be participating in building a substantial number of those towers.
Kung believes that the 149 towers planned for Sarawak will bring cellular coverage to many rural areas currently without coverage and will be most welcomed by the inhabitants who have waited long for the essential service.
“Instacom hopes MCMC will expedite the rollout of the balance number of towers as telecommunication services today is no longer a luxury but a necessity,” she pointed out.
The research arm of Maybank Investment Bank Bhd (Maybank IB Research) in a report said telecom contractors such as OCK Group Bhd, Instacom and Weida (M) Bhd which are involved in telecommunication towers construction and ownership are expected to benefit from the allocation to build telecommunication towers.
It added the need to construct more telecommunication towers in rural areas would be positive for those companies.
The government had in Budget 2015 allocated a sum of RM2.7 billion which will be spent over the next three years to build 1,000 telecommunication towers and laying of undersea cables.
As for agriculture, the hill paddy subsidy can help to boost paddy production in the state and enable farmers to reap better harvest.
On sectoral prospects, AmResearch Sdn Bhd (AmResearch) in a report said the announcement of several catalytic projects under Budget 2015 would provide fresh impetus for the construction sector after a “quiet period” over the past two quarters.
The research firm believes Hock Seng Lee Bhd (HSL) and KKB Engineering Bhd could be beneficiaries of the RM27 billion Pan-Borneo Highway, in addition to the RM4.5 billion allocation to East Malaysia for the construction of rural facilities and infrastructure.
Similarly, the research arm of JF Apex Securities Bhd (JF Apex Research) in a note said federal and state contractors such as IJM Corporation Bhd, WCT Holdings Bhd, Bina Puri Holdings Bhd, TRC Synergy Bhd, HSL and Naim Holdings Bhd are likely to emerge as winners for the Pan Borneo Highway project.
Maybank IB Research in a report observed that the Pan Borneo Highway project would also benefit the SCORE development in Sarawak, opening up new areas for development.
The research firm believed the rolling out of construction projects will continue in 2015 and support construction order book replenishment.
Maybank Research expects local companies such as HSL to ride on the booming construction activities in Sarawak driven by SCORE and increasing urbanisation.
Volatility in the stock market?
Moving on to the stock market, the Construction Index on Bursa Malaysia has advanced from 277.32 points on January 2 to 294.38 points on October 21, a growth of 6.2 per cent year-to-date signaling positive momentum for the construction sector.
Despite that, the market was generally neutral on Budget 2015 announcement as the FTSE Bursa Malaysia KLCI (FBM KLCI) did not move higher or mount a short rally.
Budget 2015 & Correlation to stock market Traditionally, the budget announcement was viewed in anticipation of some announcement of projects to be implemented and measures to spur the economy as well as the capital market.
This in turn will create “positive vibes” among investors and fund managers to buy shares of certain companies which are viewed as potential beneficiaries for projects announced during budget.
JF Apex Research in a report said its studies showed the FBM KLCI tends to rise during the week before the budget announcements.
Using statistics from the past 13 years, the research firm observed that the FBM KLCI registered positive returns in 11 out of the 13 years, a week prior to the budget and posted a marginal average gain of 1.1 per cent.
JF Apex Research said: “Budget ‘rallies’ are often followed by quick profit taking.
“Looking at the FBM KLCI’s performance in the past years, we notice that investors tend to cash out after the budget announcement as shown in seven out of the 11 years when there were pre-budget gains.
“Post-budget profit taking saw investors sold shares linked to the FBM KLCI in five consecutive years from 2005 to 2009 before a flat performance in 2010.
“2011 and 2012 saw gains of three per cent and 1.4 per cent respectively before a drop of 0.4 per cent in 2013,” the research firm noted.
While certain quarters await the ‘goodies’ to be announced during budget time which could bring joy to the stock market, this time around the FBM KLCI did not stage a rally.
In fact, the market was on a downtrend mode several weeks prior to the budget announcement.
Amid jitters over slower than expected global economy recovery and slower growth for the Chinese economy, the International Monetary Fund (IMF) had in early October downgraded the global growth forecast for 2014 and 2015 citing persistent weakness in the eurozone and a broad slowdown in several major emerging markets.
Coupled with declining crude oil prices due to weaker demand and higher production, those factors have sent global equities prices spiraled downward.
For FBM KLCI, the Index had dropped to a low of 1,767.77 points on October 16 from a high of 1,892.65 points on July 8, represented a decline of 6.6 per cent over a three-month period.
As of the time of writing, the market has recovered ground and move above the 1,800 points psychological-level and closed at – points on October 24.
Thus, analysts remain cautious on the short-term views of the market.
Market outlook for 4Q14
In view of the recent softness in stock market performance due to declining oil prices and expectation of slower global economic growth, analysts remain cautious on the outlook for the equity market for fourth quarter of 2014 (4Q14).
Some analysts believe corporate earnings for the 3Q14 reporting season due in November would not provide much surprises to boost shares prices to move higher.
Therefore, analysts foresee limited upside potential for the FBM KLCI to move higher and some have even revised downward their year-end FBM KLCI projection.
JF Apex Securities in a recent note to clients citing rising volatility, uncertainty over global economic growth and funds flow have caused the research firm to revise downward its year-end forecast for the FBM KLCI Index to 1,870 points from earlier projection of 1,920 points.
The research firm also advised investors to be cautious and ‘stay on the sideline’ until a clearer market direction formed.
“We are cautious as the (FBM KLCI) Index trades below the 200-day moving average of 1,850 points.
“Although 4Q14 is seasonally a good quarter for the year mainly driven by window dressing activities, we think that gains might be capped by weak external sentiment and concerns such as high valuations as well as volatility of funds flow among asset classes in view of mixed global economic outlook,” it said.
On another note, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) in a report said it does not foresee immediate re-rating or price catalysts emerging for the stock market.
Nonetheless, the research firm believed the market will be supported by strong domestic liquidity and favourable future corporate earnings especially for 4Q14 and 1Q15.
It said: “In tandem with the weaker corporate results and less bullish earnings growth prospect, our Index (year-end) target has been revised lower to 1,910 points from 1,960 points previously.
“The earnings and Index target revision were in line with consensus’ expectations.
“Additionally, with the implementation of GST in April 2015, corporate earnings may see risk of slower top-line growth due to lower demand or lower profit margins owing to higher operating expenses,” it said.
Moreover, the research division of MIDF Amanah Investment Bank Bhd (MIDF Research) in a report said current year consensus earnings estimate of the FBM KLCI has seen persistent downward revisions in the past three earnings reporting quarters.
The research firm pointed out that the downward earnings revision is not a healthy situation noting that the adjustment has kept the market to experience high price-to-earnings (PE) valuations.
Nevertheless, MIDF Research believed the current year high PE valuation is expected to reflect next year’s earnings growth albeit at a slower growth rate.
Therefore, the research firm estimates the FBM KLCI could still have opportunity to trend upward next year if corporate earnings is going to perform better than expectations and the likelihood of earnings projection being revised higher.