Last week, BizHive Weekly explored themes that could explored for the Budget 2018 which will be announced on October 27.
Next year’s Budget is an important event, given that most experts and analysts in the political field and market observers believe that Malaysia’s general election is looming close.
Furthermore, 2018 marks the mid-point stage of the government’s journey through the 11th Malaysian Plan (11MP) and the government has to step up its game in the race to achieve vision 2020.
Unlike previous years, however, analysts believe that for next year, Malaysia will be starting the year on better footing as the global economic conditions are improving and there were less volatilities seen this year and previous years.
The research arm of Maybank Investment Bank Bhd (Maybank IB Research) in its pre-budget 2018 report, highlighted: “In particular, we are having real gross domestic product (GDP) growth recovery so far this year compared with the slowdown recorded the last two years as the lifts in global economy and world trade fuel the rebound in exports, adding to the resilient and better-than-expected consumer spending growth.”
It also pointed out that with 2020 just a few short years away, there is also a need to identify Malaysia’s progress in achieving key 11MP targets.
Meanwhile, AllianceDBS Research Sdn Bhd (AllianceDBS Research) said while improving macroeconomic data, especially domestic consumption recovery, robust export growth and continued government’s spending on infrastructure, would be the key drivers for the Malaysian equity market, all eyes will be on the unveiling of Budget 2018 this month which will be the last budget before the 14th general election is due to be called latest by August 2018.
“We expect the government to continue its fiscal discipline but with the Brent crude oil prices on the rise following production cut led by OPEC, we believe the government will have some headroom for the forthcoming budget.
“That said, focus will continue to be alleviating the livelihood of the bottom 40 per cent households. We also highlight the trend that past general elections have coincided with strong consumer sentiment.
“As such, the forthcoming budget is expected to provide a boost to sustain the nascent consumer sentiment recovery before the 14th general election is called,” it said, noting that incentives such as cash hand-outs, salary adjustments, affordable housings, and others could be key points to be highlighted in Budget 2018.
Besides these, it added education would also be a key focus of the government in raising productivity in its bid to become a high-income nation.
Prime Minister Datuk Seri Najib Tun Razak had also reiterated that the government will continue to focus on the people’s economy, aside from addressing the need to balance the country with macro factors.
“We also talked about our country’s economic position by taking into account several favourable macro-factors, including the second-quarter growth rate this year which reached 5.8 per cent.
“We’ve achieved the largest amount of international reserves in our history … and also for the past two days, we’ve seen the strengthening of the ringgit becoming a reality,” he told a press conference last month.
With all these themes expected to be a focus during Budget 2018, BizHive Weekly explores the sectors and industries that could be involved or could see a boost in budget allocations next year.
Property – A limelight on affordable housing
The issue of affordable housing has generally been discussed and debated for the last couple of years.
The widening discrepancy between housing property prices and the people’s average income continues to become an on-going problem for the government and developers who are also trying to keep prices down amidst the current economic condition.
In 2015, a report by Khazanah Research Insitute revealed that residential properties prices in vastly populated areas or urban areas such as Kuala Lumpur and Penang were both ‘severely unaffordable’, with a median multiple of 5.4-folds, further shedding light on the need to boost the supply of affordable housing.
According to a report by RHB Research Sdn Bhd (RHB Research), while property transactions have dried up significantly, prices have not corrected enough – this is even after three consecutive years of slowdowns in the property market.
“In 2016, the residential and non-residential property transaction volumes year-on-year (y-o-y) fell 14 and 25 per cent respectively. At the same time, transaction values still climbed four per cent (residential) and 82 per cent (non-residential), potentially due to some en bloc transactions.
“The growth in Malaysia’s House Price Index has moderated to 5.3 per cent in the first quarter of 2017 (1Q17) compared with 13 to 14 per cent during the peak in 2012 and 2013 respectively,” it said.
Under 11MP (2016 to 2020), the government set the target of building 653,000 homes for the poor, low-income and middle-income households under various programmes, compared with 111,000 and 102,200 units that were built under 9MP (2006 to 2010) and 10MP (2011 to 2015), respectively.
This year is expected to be no different than before as Budget 2018 could also focus on affordable housing, with initiatives that are expected to benefit both the consumers as well as developers.
Analysts generally believe that Budget 2018 could see announcements further initiatives for the government’s on-going affordable housing programme; 1Malaysia People Housing (PR1MA) and PPA1M.
Nevertheless, expanding the affordable housing programme is not a clear cut solution as the research arm of Maybank Investment Bank Bhd (Maybank IB Research) opined, in the case of PR1MA, of the original 500,000 affordable homes targeted to be constructed over a five year period of 2013 to 2018, to date, only 267,902 units have been approved nationwide and of these, 139,393 units are currently under construction, and 8,475 units has been completed as at August 16, 2017.
As such, the research team believed that for 2018, the government could announce a single or central authority to oversee the affordable housing market and to ensure that the projects run on time.
“This entity – likely modelled after similar bodies oversease like Singapore’s Housing Development Board – should consists of relevant federal government ministries and agencies, state governments as well as the property and financial industry players.
“The objectives, among others, are to better coordinate public and private sector affordable housing programmes and projects to avoid over-building, and to better match supply and demand via improved information and database on eligibility, products, pricings, locations, and financing,” it added.
Aside from the disparity between supply and demand, Maybank IB Research also pointed out that location remains an issue for affordable housing.
“The new authority could play a role in addressing this particular issue such as coordinate the process of identifying and designating federal and state government lands – especially in urban and startegic areas, and including undeveloped/unutilised Malay reserve lands and wakaf lands – for the purpose of land banking for affordable housing; incentivising government-linked property companies and private developers to carve out some of their land banks for affordable urban housing within a certain price range such as not more than RM400,000,” the research team suggested.
It noted that there are already ‘one off’ deals for PR1MA to build affordable housing on lands belonging to government-linked agencies and companies such as Royal Malaysian Customs Department (in Penang), and TNB (in Selangor).
On the developers’ side, although developers continue to lobby the government to ease some of its policies as well as extend the step-up end-financing scheme, analysts believe that the government would likely retain some of these policies such as retaining the real property gains tax (RPGT).
The research arm of AmInvestment Bank Bhd (AmInvestment) explained, “ We believe the government is likely to retain the existing RPGT at 30, 20 and 15 per cent for properties sold with the third, fourth and fifth anniversary of the purchase. This is to curb speculative activities in the property market.
“We expect a focus on the commercial viability of affordable homes with targeted measures and waivers to support property developers.”
It added, “The property sector could see some measures that support the buyers by raising the EPF withdrawal limit to purchase home from Account 2 to 50 per cent from 30 per cent currently, and reduce the incidental costs of owning an affordable home by extending the full waiver of stamp duty for first-time buyers of affordable homes beyond December 31, 2018 (as announced in Budget 2017), and raising the threshold to a maximum of RM500,000 from RM300,000 currently.”
Maybank IB Research also believed that Budget 2018 could contain measures or incentives to promote and facilitate affordable housing ‘rent-to-own’ schemes by property developers and/or financial institutions (such as under lease or Ijarah concept provided by Islamic banks) as alternatives to complement the existing ‘rent-to-own’ measures on affordable housing.
Of note, the ‘rent-to-own’ concept had already been introduced in Budget 2017. It is a special flexible step-up and financing scheme, in collaboration with Bank Negara Malaysia, EPF, and four major banks which are Maybank, CIMB, RHB, and AmBank. The scheme is specifically implemented for PR1MA housing.
Those eligible for the scheme, will be able to rent PR1MA homes for up to 10 years and at the end of the fifth or 10-year period, they could buy the home at a pre-determined price.
AllianceDBS Research also believed that the government could announce more measurements to better assist and benefit the affordable housing market.
“According to the latest press release by Real Estate and Housing Developers’ Association Malaysia (REHDA), end-financing remains the major issue for unsold units, with around half of the loan rejection coming from buyers of properties priced RM500,000 and below – within the affordable housing range.
“Therefore, we expect the government to revise its current PR1MA end-financing scheme to better assist and benefit the affordable housing market.
“Besides that, we propose a new transit rental home scheme, to provide an affordable housing option for fresh graduates.
“Under this scheme, rental of units can range from RM300 to RM500 per month (depending on location). Furthermore, this scheme could include a clause to purchase the home after three to five years,” it explained.
Meanwhile, RHB Research noted considering that the next general election is coming up, the
government could prefer to keep the existing cooling measures in place so that property price growth can be contained.
However, it opined, “Having said that, we think any policy relaxation may lift investor sentiment in the industry, as the sector has been performing sluggishly for a long time.”
It also pointed out, while the banks are likely to remain tight on mortgage lending, other policies – such as the real property gains tax, minimum threshold for foreign purchases, and 70 per cent loan to value (LTV) cap for third mortgages – could potentially be eased.
Construction:Allocations to spur developments
Infrastructure development remains a key to Malaysia’s economic growth. Budget 2018 will no doubt introduce allocations for major projects that could spur the economic growth of the country.
Maybank IB Research pointed out that infrastructure remains key mid- to long-term agenda and the infrastructure development is “by default” given the record RM137 billion infrastructure construction jobs awarded last year.
“With on-going and upcoming multi-year mega infrastructure projects such as Klang Valley Mass Rapid Transit 2 (KVMRT2), Klang Valley Light Rail Transit 3 (KVLRT3), Pan-Borneo Highway and East Coast Rail Line (ECRL), the rising trend in gross development expenditure (GDE) since 2015 should be maintained in Budget 2018, especially considering that of the RM260 billion GDE target under 11MP (2016-2020), RM42 billion was spent in 2016 and RM46 billion was allocated under Budget 2017, leaving RM172 billion for 2018 to 2020, equivalent to RM57.3 billion per annum,” it said.
It also highlighted that projects such as the Pan-Borneo Highway and ECRL are expected to be funded via issuances of government-guaranteed bonds – a key means of financing infrastructure in Malaysia.
“If not via existing special purpose vehicles (SPVs) like Danainfra and Prasarana (used for the funding of KVMRT and KVLRT projects), Budget 2018 may announce the setting up of new SPVs for government-guaranteed funding of PBH and ECRL,” it added.
Maybank IB Research added, the momentum in infrastructure investment and spending would be further sustained by the expected start of the KL-Singapore High Speed Rail (KL-SG HSR) construction next year and the possibility of the implementation of KVMRT3 project being brought forward given the targets for the project getting the Cabinet’s nod is by mid-2018 and construction rollout is by late-2018 or early-2019.
Meanwhile, the research arm of Affin Hwang Investment Bank Bhd (AffinHwang) believed that the government could allocate RM48 billion for Malaysia’s development expenditure, with an addition RM2 billion for contingency reserves.
It explained, “In the first two years (2016 to 2017) of the 11MP, the Federal Government has only disbursed about 34 per cent or RM88 billionn of the total RM260 billion, where development expenditure will likely be increased over the next three years.”
Aside from that, AmBank noted that construction activities would continue to benefit from the infrastructure activities, upgrading of road works, non-residential activities like mixed commercial developments, and residential properties led by affordable housing programmes.
“Incentives are expected for contractors who adopt new building technologies such as the industrialised building system (IBS) and aluminium formwork system which help reduce wastage and save construction time, encourage contractors to invest in new construction machineries, and collaborate with the government to train skilled crane and machinery operators,” it added.
Consumerism sees efforts to spur consumption, improve sentiments
At the heart of Budget 2018, analysts believe that spurring private consumption remains key to boosting Malaysia’s economy.
AffinHwang explained, “As rising cost of living remains a concern, expectations are that the 2018 Budget proposals will be generous, with cash assistance for the people, especially the lower income households.
“This will likely include measures such as the extension of 1Malaysia People’s Aid (BR1M), where cash assistance of RM1,200 to households with a monthly income of below RM3,000, remaining the same from the 2017’s allocation of equal amount.”
For the medium income group earners, there is a possibility for the government to cut personal income tax rate in Budget 2018.
Based on new tax reliefs announced during Budget 2017, AffinHwang believed that Budget 2018 could also see a few new tax exmptions.
“With a possible personal income tax cut, we also expect the government to provide additional personal income tax reliefs for spouse as well as relief for children. At the same time, the government may relook and include some tax reliefs, which have been left unchanged for few years, such as tax relief on life insurance premiums as well as other premiums paid on education and medical policies,” it said.
Another possible measure to boost private consumption could be on the targeted fuel subsidy proposal, AffinHwang added.
“In the past, the government had indicated that the targeted fuel subsidy was being studied. However, with the global oil price increasing and hovering around US$50 to US$55 per barrel, leading to higher domestic retail fuel prices, we believe that the government will begin to relook at the targeted fuel subsidy, especially for low income households,” it opined.
Finance: A nod towards better financing for consumers, SMEs
For the financial sector, AmInvestment hoped the government would extend the 20 per cent stamp duty exemption on the principal or primary instrument of financing in accordance to syariah principles, and further tax incentives for loan instruments under syariah principles, particularly for SME borrowers.
It opined, “The government is likely to reaffirm its support to small- and mid-cap stocks listed on Bursa Malaysia by mandating government-linked funds to actively invest in them again, as well as forking out allocation to expand the Mid and Small Cap (MidS) Research Scheme.”
To recap, under Budget 2017, the government has mandated GLC funds to allocate up to RM3 billion to invest in this space. The MidS Research Scheme has been launched with an initial funding of RM75 million.
The research team also expect Budget 2018 would introduce more incentives to boost participation in private retirement schemes (PRS).
Auto: Facilitating growth with incentives, reliefs
For the last few years, the government has announced various initiatives to boost development and usage of Energy Efficient Vehicles (EEVs) and improve the overall automotive sector. From introducing incentives for consumers purchasing EEVs to the allocation of RM4.6 billion for Technical Vocational Education and Training (TVET) institutions which experts believe could also eventually benefit the automotive industry.
For Budget 2018, some relief and allocation to the automotive sector are also in the pipeline.
AmInvestment expected that the automotive sector could see relief in the form of further tax exemption for localisation, and a reduction in excise duties and/or import duties as the industry has been plagued by high input costs due to the ringgit’s weakness.
“These savings could help lift carmakers’ margins from the doldrums, as well as lower car prices to stimulate demand,” it opined.
As for initiatives to boost EEVs in Malaysia, the research team said while the current incentives on hybrid and electric vehicles play a role in contributing to a cleaner environment, the impact is very limited given that hybrid and electric vehicles in the market currently are largely premium models that sell in low volumes.
Nevertheless, it commented, “We believe the incentives may be extended to include more mass-market EEVs.
“After all, EEVs offer lower emissions and better fuel efficiency.”
It also believed that Budget 2018 could see incentives to mitigate the six per cent GST to jog consumer spending on automobiles – entry-level hatchbacks and sedans for the low-income group (the bottom 40 per cent of households or B40) and civil servants, and mid-range sedans or cheaper crossovers for the middle income group (M40).
Meanwhile, RHB Research noted fiscal changes related to the automotive sector are typically implemented through the National Automotive Policy and this might include initiatives like car-scrapping incentives or more drastically, a vehicle end-of-life (EOL) policy.
Nevertheless, the research team believed that with the possible general election looming close, an EOL policy is highly unlikely, at this juncture.
“Excise duty exemption for first-time car buyers was also mooted last year, ahead of the 2017 budget. While this could be nominally positive for the industry, we see implementation issues arising, such as a potential increase in household indebtedness, and the creation of market distortions via the shifting future automobile demand to the present,” it said.
Market outlook for 2018
Overall, the announcement of the Budget 2018 will likely spur activities on the stock market.
Budget 2018 could also determine Malaysia’s growth path for next year and with that, its global economic ratings.
Historically, analysts believe that Budget 2018 as well as the oncoming general elections would lead to a jump in consumer sentiment.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) highlighted that past general elections coincide with strong consumer sentiment.
“With the Budget 2018 seen as the last budget before the 14th general election needs to be called (latest by August 2018), we believe it will provide further impetus for the nascent recovery in sentiment to gain further momentum,” it added.
On a macro perspective, the research team pointed out that the rebound in crude oil prices provide some fiscal relief for the federal government. All in, it believed Malaysia’s fiscal discipline would be maintained.
“We maintain our end-2017 FBM KLCI target at 1,800 and introduce our 2018 target of 1,870 (implied 16.6-times price earnings) which are derived using bottom-up valuation approach.
“Our key investment themes remain unchanged, which are consumption recovery, exports, and transport-related infrastructure,” it added.
Meanwhile, RHB Research believed that the market would also want to see continued fiscal discipline under the watchful eyes of international rating agencies.
“We expect the fiscal deficit for 2018 to be further trimmed to 2.9 per cent of GDP (lower by three per cent compared with 2017).
“More careful control of opex would leave more leftover for development expenditure, benefitting smaller contractors and building materials suppliers.
“These conflicting objectives ultimately point to a need for another fine balancing act, which demands that investors stay grounded and keep their eyes on market fundamentals,” the research house opined.