By Sherilyn Goh
The government would have to reduce its deficit more aggressively from between 2017 and 2020 to attain a balanced budget by the end of the decade, according to AllianceDBS Research.
The fiscal deficit-to-gross domestic product (GDP – sum of goods and services produced in a year) ratio is expected to decline marginally to 3.1% in 2016 from 3.2% in 2015.
Budget 2016, unveiled by Prime Minister Najib Abdul Razak in Parliament last Friday, was deemed by analysts as a juggling act of managing revenue gains and containing expenditure, on the backdrop of plummeting oil prices which hurt government coffers. Although the government expects its fiscal deficit to GDP ratio to decline marginally to 3.1% due to weak revenue growth, the 2016 deficit value is projected to be higher at RM38.8 billion, compared to RM37.2 billion in 2015.
According to the research house, a further RM7 billion in expenditure needs to be slashed yearly from 2017 to 2020 to achieve a balanced budget at current circumstances.
Meanwhile, Budget 2016 revenue is expected to increase 1.4% in 2016 to RM225.7 billion, while operating expenditure allocation increases by 0.9% to RM215.2 billion. The government allocates RM50 billion for development expenditure, up from RM47.4 billion allocated in 2015. The research house noted that revenue gains in Budget 2016 depend largely on collection from the goods and services tax (GST), which adequately offset the decline in oil-related contributions, projected to account for 17.3% and 14.1% of total revenue respectively.
The GST, implemented since April 1 this year, has contributed RM27 billion to government coffers, and is expected to contribute another RM39 billion in 2016.
A market neutral budget
Budget 2016 is seen to be focusing largely on containing expenditure, prioritising spending on high-impact projects and alleviating cost of living on rural and lower-income households.
What comes as most surprising are the increase in income tax rates for those who fall within the income bracket of between RM600,000 and RM1 million – who will see their tax rate being raised to 26% from 25% previously – and for those earning above RM1 million, who will then see their personal tax rates being raised to 28% from 25% previously. The more progressive tax rates, according to CIMB Research, is unprecedented and should be offsetted by higher spending from low income earners and civil servants, following the increase in minimum wages and various incentives announced in the Budget for the public sector.
Services and manufacturing are expected to remain pillars of growth in the coming year, contributing 55% and 23% to GDP respectively. Private consumption and private investments are anticipated to moderate.
Both AllianceDBS and CIMB Research come to view Budget 2016 as no positive surprise to the market, as infrastructure projects announced are mostly “regurgitated”, with most of them being funded off balance sheet. Kenanga Research also noted that there have been no corporate tax cut as initially expected, but targeted tax incentives for certain industries were offered instead.
Consumer and construction biggest gainers
While Budget 2016 offers targeted tax incentives for certain industries, AllianceDBS expects business appetite for capital spending to dampen given the current business climate. While positive for domestic consumption, the impact of the Budget on corporates are viewed to be muted due to rising cost of doing business.
The national minimum wage will be increased from RM900 to RM1,000 per month for Peninsular Malaysia, and from RM800 to RM920 for East Malaysia. This, according to CIMB Research, will increase operating costs for labour-intensive industries such as plantations, construction and manufacturing. The impact on the construction sector is mitigated by the fact that average wage is already within the range of between RM1,000 and RM1,200 in the sector.
HLIB Research views consumer and construction as the biggest beneficiaries of Budget 2016, as both experience minimal impact on margins from a higher minimum wage. Other sectors expected to benefit from the Budget include education, glove, oil and gas, real estate investment trusts, technology, and air transportation.
While the positive impacts are unlikely to significantly boost profits, the research house notes that the advantages enjoyed by the sector are likely to sustain prospects. On the other hand, export-oriented technology players and construction companies remain core buys for AllianceDBS, given more visible earnings and growth trajectory. Gamuda, Inari Amertron, Globetronics, and Muhibbah Engineering were named as top picks.
Beaten down big cap stocks too deserve a relook due to government’s announcement for GLCs and GLICs to invest domestically, added AllianceDBS, naming Public Bank, Hong Leong Bank, and Tenaga Nasional Bhd (TNB) as top picks.
As a result of the RM20 billion ValueCap fund announced, HLIB Research sees opportunity in undervalued big cap stocks including Axiata, IJM, Maybank and TNB, though noting that impacts will only be felt in 2016 as the market rally months after initial announcement due to the time needed to mobilise funds.
Construction catalysts are expected when actual contract awards under the 11th Malaysia Plan kick in come 2016. Gainers include Edgenta, IJM, KNM, Mitrajaya.
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