Post Budget Economics Outlook - Peck Boon Soon, Head of Economics, RHB Research Institute

RHB Research Institute

1

RHB Research Institute

2October 2014

Post Budget Economics Outlook

MALAYSIA

Ensuring fiscal sustainability

RHB Research Institute3

Strategy put forth to ensure a smooth transition to the 11th Malaysia Plan (11MP) and advance up the value chain.

Developing human capital & entrepreneurship. Encouraging research and innovation. Nurturing the growth of SMEs. Promoting the growth of the services sector.

Indeed, a new approach known as the Malaysia National Development Strategy (MyNDs) is being formulated and will be a key basis to planning and preparation of programmes and projects under the 11MP.

Emphasis on using limited resources optimally. Focus on high-impact projects and programmes at low cost. Efficient and rapid implementation.

11MP will cover the final crucial leg in the country’s transformation into high-income nation by 2020.

2015 Budget: Strategy to move up value chain


A well-balanced 2015 Budget combining commitments to achieve greater fiscal prudence but mindful of the impact of the higher costs of living.

Greater fiscal prudence will be achieved with the introduction of GST in April 2015 that will broaden the tax and partially help to bring down the fiscal deficit to 3% of GDP.

The impact of higher costs of living will be cushioned with a proposed reduction in income tax by 1-3% from YA2015 and corporation income tax by 1% from YA2016, a MYR300 hike in BR1M handouts to MYR950, and a new petroleum subsidy mechanism in the pipeline

A multi-tiered fuel subsidy rationalisation scheme to cut fuel subsidy and contain operating expenditure.

Good progress in the implementation of the Economic Transformation Programme and building economic resilience.

The budget specifically mentioned several expressways coupled with MRT2 (MYR23bn) and LRT3 (MTR9bn), as well as the Pan-Borneo Highway (MYR27bn).

The property and sin sectors (brewery, tobacco and gaming) are spared this time, while pump-priming efforts will continue with a 15% increase in gross development expenditure to MYR48.5bn.

2015 Budget: Pro growth and ensuring fiscal sustainability


Federal Government’s financial position

2013 20141 20152

MYRbn % change MYRbn % change MYRbn %

change

Revenue 213.4 2.6 225.1 5.5 235.2 4.5

Total Expenditure 253.5 0.4 263.3 3.9 271.9 3.3

Operating Expenditure 211.3 2.8 221.1 4.7 223.4 1.1

Gross Development Expenditure 42.2 -10.1 42.2 0.03 48.5 14.9

Less: Loan Recoveries 1.5 0.9 1.0

Net development expenditure 40.7 -8.2 41.3 1.4 47.5 15.0

Overall Balance -38.6 -37.3 -35.7

% to GDP -3.9 -3.5 -3.0

Sources of financing:

Net domestic borrowing 39.5 37.6 -

Net external borrowing -0.2 -0.4 -

Change in assets -0.7 0.2

Debt to GDP % 54.7 54.1 53.1

1: Revised estimates by MOF 2: Budget forecasts, excluding 2015 tax measuresNote: Total may not add up due to roundingSource: Economic Report 2014/2015, Ministry of Finance


Revenue boosted by GST MYR23bn

A sharp increase of 15% in development expenditure in 2015 (+1.4% estimated for 2014), which has a larger multiplier impact on the economy. Housing, education, trade & industry and transportation.

Operating expenditure being contained at a marginal rise of 1.1% in 2015 (+4.7% estimated for 2014) Rationalising fuel subsidies.

Federal Government financial position

Operating expenditure moderating but still at uncomfortable level

Operating expenditure will still take up 95% of government revenue in 2015 (98.2% in 2014).

Step in the right direction, but still at an uncomfortable high level.


… 2015 Budget’s Impacts


Consumer spending growth though slowing, remains resilient

GST will add to compliance cost and push up inflation.

Reeling from the impact of policies over the last 2 years.

Measures to rein in household debt (86.8% of GDP in 2013). Measures to cool down property speculation. Fuel subsidy rationalisation and fiscal consolidation.

Domestic demand growth is on a moderating trend

Source: Department of StatisticsSource: Department of Statistics

A revitalisation of investment

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

f

-30

-20

-10

0

10

20

30

40

50

% y-o-y

Fixed capital formation

Privateinvestment


2012 responsible lending - Based on net income instead of gross

Promote a sound and sustainable household sector in July 2013

Personal loans – max 10 years

Property loans – max 35 years

No pre-approved personal loans

Measures to control household debt

Source: Bank Negara Malaysia

Rising household debt a concern

02 03 04 05 06 07 08 09 10 11 12 13

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

RM

bn

% o

f G

DP

(RHS)

(LHS)

09 10 11 12 13 J-A14

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Approved consumption loans

% c

hang

e


A sharp slowdown in housing loan approvals

RPGT to be raised to 30%

Foreigner can only buy property above RM1m

Display detailed sales prices

Ban developer interest bearing scheme

Property cooling measures in 2014 Budget – The effect will be felt more significantly in 2015

Source: Bank Negara Malaysia

Growth of outstanding housing loan holding up

J1

0 M M J S NJ

11 M M J S N

J1

2 M M J S NJ

13 M M J S N

J1

4 M M J

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

% y

oy

Limit on L-T-V ratio

Macro prudential mea-sures Macro prudential mea-

sures

08 09 10 11 12 13 J-A14-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Approved housing loans

% c

hang

e


Has moderated from 3.5% y-o-y in Fed-March 2014 to 3.2-3.3% in July-August. Effect of the upward adjustments in administrative pricing started to taper

off and a higher base effect set in.

The 9.5-10% increase in retail petrol and diesel prices with effect from 2 Oct could add about 0.7ppt to headline inflation in the immediate term (full-year impact: <0.2ppt), but this will likely be subdued by the higher base effect.

Headline inflation to spike up in 2015

Inflation accelerating

Source: Department of Statistics

Full-year 2014 inflation likely to be around 3.4% (2.1% in 2013).

The 6% GST will add about 1.8ppts to inflation; 9-month impact for 2015: +1.4ppts. 2015 headline inflation is likely to be close to 4.2%


Expand scope of goods and services that are not subject to GST Electricity consumption exempted from GST to be increased from

first 200 to 300 units No GST on retail sales of RON95, diesel and LPG Restructure individual income tax for year of assessment 2015

Individual: reduced by 1-3% Tax payers with family & income of MYR4,000/month: no tax

liability Maximum rate of chargeable income: increased from exceeding

MYR100,000 to exceeding MYR400,000 Current maximum tax rate: 26% reduced to 24%, 24.5% & 25% Increase tax reliefs for certain categories

Reduce income tax rates for Companies (2016), SMEs (2016) & Cooperatives (2015) by 1-2%.

Provide incentives & assistance to businesses on training, & purchase of equipment and software relating to GST

Mitigating the impact of GST


Strengthen food supply chain, establish 65 permanent farmers’ markets; 50 fish markets (2015 – 2017)

Provide intercity bus services to those residing outside of but working in KL with 30% discounted monthly fare

Financial assistance for poor families, children, senior citizens & OKU

Increase living allowance for fishermen MYR200-300 per month Half month bonus to civil servants; MYR250 for pensioners MYR100 to all primary and secondary students; MYR250 1Malaysia Book Voucher Bantuan Rakyat 1Malaysia (BR1M) Programme

Consumer spending to be cushioned by BR1M

Category Monthly Income BR1M Value

Household Below MYR3,000 MYR950 (2014: MYR650)

MYR3,000 -MYR4000 MYR750 (2014: MYR450)

Individual MYR2,000 and below MYR350 (2014: MYR300)


PR1MA: Construction of 80,000 units: MYR1.3bn Rent-To-Own scheme

Extend 50% stamp duty exemption on instruments of transfer and loan agreements and increase purchase limit to MYR500,000 until 31 Dec. 2016

Improve Skim Rumah Pertamaku under Cagamas Youth Housing Scheme

Monthly assistance MYR200 for 2 years to ease installments burden

50% stamp duty exemption on instruments of transfer and loan agreements

10% loan guarantee to get full financing

Housing in 2015 Budget to help lower income group


Construction/upgrading of infrastructure projects: Sungai Besi – Ulu Klang Expressway (SUKE): MYR5.3bn

West Coast Expressway from Taiping to Banting: MYR5bn

Damansara – Shah Alam Highway (DASH): MYR4.2bn

Eastern Klang Valley Expressway (EKVE): MYR1.6bn

East Coast railway line: MYR15mn

MRT Line 2 from Selayang to Putrajaya (56 km): MYR23bn LRT 3 linking Bandar Utama to Shah Alam & Klang: MYR9bn Pengerang Integrated Petroleum Complex (PIPC): MYR69bn Build Pan-Borneo Highway (MYR27bn): Sarawak (936 km),

Sabah (727 km) High-Speed Broadband (HSBB) - Build 1,000 new

telecommunication towers & lay undersea cables: MYR2.7bn Construction of Air Langat 2 Water Treatment Plant: MYR3bn Sustainable Mobility Fund to develop the electric vehicle

manufacturing industry: MYR70m.

More infrastructure spending to support private investment


Income tax exemption for industrial area management 100% exemption for less developed areas (5 years) 70% exemption for other areas (5 years)

Capital allowance to increase automation in labour-intensive industries High labour-intensive industries: 200% on the first MYR4m

expenditure (2015-2017) Other industries: 200% on the first MYR2m expenditure (2015-

2020) Introduce customised incentive package to increase MNCs

global operation centres Setting up Services Sector Guarantee Scheme: MYR5bn Reintroducing Services Export Fund (SEF): MYR300m Export duty exemption for CPO extended until December 2014 Regulatory price mechanisms for rubber smallholders (MYR100m

allocation)

Some incentives for business in 2015 Budget


The Central Bank might have done with the rate hike for the year.

Policy shifted to focus on the strength of the economic growth.

Still a challenging global economic environment.

Inflation will spike up after the GST comes into effect from April 2015 with real interest rates turning more negative. No rush but another 25bps rate hike cannot be ruled out in 1Q2015.

Raising the OPR will provide some support to the ringgit and enable the Central Bank to manage a more orderly outflow of short-term capital at a time when domestic consumer spending will likely spike up ahead of the GST implementation.

No rush for monetary tightening


… External front fraught with challenges


Global ISM new orders and industrial production on a rising trend

Stall-speed recovery in the major world economies, although the broad picture still points to sustained, albeit uneven growth in the period ahead.

Supported by the uptrend in global ISM new orders and industrial production.

And the fact that ECB has responded with significant policy measures to revive growth, while Japan and China have room for policy easing.

Advanced economies in a “stop-and-go” recovery mode

Source: BloombergSource: Bloomberg

Advanced economies in a “stop-and-go” recovery mode

11 12 13 14-8-6-4-202468

1012

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

% annualised

US (LHS) Japan (LHS)

Eurozone (RHS) UK (RHS)

% annualised

05 06 07 08 09 10 11 12 13 1430

35

40

45

50

55

60

65

70

-100

-80

-60

-40

-20

0

20

40

60

80

100

%, y-o-y

ISM new orders (LHS)Global Industrial Index (RHS)

Index


US capital goods new orders and equipment investment bouncing back

On a steadier recovery path.

Shale gas revolution.

Sustained jobs creation.

The strength hinges on the US economy

Source: FHFA (Federal Housing Finance Agency)Source: Bureau of Labour Statistics

US manufacturing & services activities remain robust

Housing price recovery.

Lack of a fiscal drag by itself is a big plus.

US housing price on recovery pathSustained jobs creation critical for consumer

spending and growth

Source: Bureau of Labour StatisticsSource: US’s Institute for Supply Management (ISM)12 13 14

48

50

52

54

56

58

60

62

Index

ISMmanufacturing

ISMNon-manufacturing

05 06 07 08 09 10 11 12 13 1450,000

60,000

70,000

80,000

90,000

100,000

110,000

100

110

120

130

140

150

160

USD bnUSD bn Capital goods(RHS)

Equipment investment

(LHS)

05 06 07 08 09 10 11 12 13 14

-1000-800-600-400-200

0200400600

m-o-m, thousand 12-mth MA 6-mth MA

(Private non-farm)

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

-10.0

-5.0

0.0

5.0

10.0

15.0

% y-o-y (House price index)


Eurozone’s inflation below target

Economy ground to a halt in the 2Q.

ECB has responded twice on 5 June and 4 Sept – to counter the downtrend of the economy.

Cutting interest rates. Providing cheap funds to spur bank lending. Buy asset-backed securities and covered bonds issued by Eurozone banks.

Draghinomics countering the Eurozone’s deflation threat

Source: European Central BankSource: European Central Bank

Economic recovery in the Eurozone stalled in the 2Q

2011

2012

2013

2014

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

% q-o-q

0.0(Q2)

05 06 07 08 09 10 11 12 13 14-1

0

1

2

3

4

5

% y-o-y

CPI

Core CPI


Japan’s manufacturing activities and retail sales bouncing back

Fear of consumption tax hike derailing the economic recovery.

Abenomics has brought down unemployment to just 3.8% and the GDP deflator has narrowed to close to zero.

Beginning to make headway in its “Third Arrow” in implementing the fundamental restructuring of the economy.

Abenomics’ structural reforms have just started

Source: Markit EconomicsSource: Japan Statistics Bureau

Japan’s economy plunged into a sharp contraction after a sales tax hike

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08

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10

11

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13

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-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

% annualised

-7.1%(Q2)

11 12 13 1440

42

44

46

48

50

52

54

56

58

-6

-4

-2

0

2

4

6

8

10

12

% y-o-yIndex

Retail sales(RHS)

PMI Manufacturing

(LHS)PMI

Services(LHS)


China industrial production, fixed asset investment and retail sales slowing down

Still struggling with its debt burden while undergoing transformation.

But there is a strong political will to steer its economy for a soft landing.

Selective policy easing. Managing debt burden relatively well.

Tail risk could potentially emerge from the large commodity-dependent economies, but will unlikely degenerate into another major crisis, in our view.

China start-stop economy creates jitters, but growth will likely hold up

Source: China’s National Bureau of StatisticsSource: China Federationof Logistics & Purchasing (official PMI), Markit Economics (HSBC PMI)

China’s HSBC and official manufacturing PMIs still weak

2011

Jul

2012

Jul

2013

Jul

2014

Jul

47

48

49

50

51

52

53

54

55

Index

OfficialPMI

HSBCPMI 05 06 07 08 09 10 11 12 13 14

0

5

10

15

20

25

1517192123252729313335

Retail sales (LHS)Industrial production (LHS)Fixed asset investment (RHS)

%, y-o-y %, y-o-y


Reflected in divergent trends of PMI new orders and manufacturing activities of the major world economies.

Causing another cycle of disinflation in 3Q 2014, led by the absence of inflation in the Eurozone.

Advanced economies, nevertheless, will unlikely be able to transition from a recovery to an economic boom anytime soon

Divergent trends of manufacturing activity in the major world economies

Source: Markit Economics

2012 Jul 2013 Jul 2014 Jul44

46

48

50

52

54

56

58

60

Index

US

JapanChinaEuro


Policies in the major world countries will remain very accommodative and supportive of equities.

The inability of the developed countries to transition from a recovery to an economic boom suggests that there is no risk of significant policy tightening that will cause the uptrend in global equities to reverse course anytime soon.

It is just that it is more susceptible to a short-term setback due to the occurrence of an unexpected event.

What is also worth highlighting, in our view, is that in a subdued growth environment, corporates do not have much pricing power and with weak demand, inflation will well behave.

The good news is:


Source: Dept. of Statistics

The bad news is: Exports started to turn sluggish in July-Aug, partly ex-rate factor partly high base

effect (MOF forecast 2.1% in 2015 vs 3.5% in 2014) Dragged down by uneven global economic growth

Geopolitical tensions in Eastern Europe and the Middle East Uncertainty over global interest rate normalisation and policy adjustments in

advanced economies Slower growth in emerging economies

Malaysia’s exports moderating in the 2H


1-Ja

n-08

26-F

eb-0

822

-Apr

-08

17-Ju

n-08

12-A

ug-0

87-

Oct

-08

2-De

c-08

27-Ja

n-09

24-M

ar-0

919

-May

-09

14-Ju

l-09

8-Se

p-09

3-No

v-09

29-D

ec-0

923

-Feb

-10

20-A

pr-1

015

-Jun-

1010

-Aug

-10

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ct-1

030

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-10

25-Ja

n-11

22-M

ar-1

117

-May

-11

12-Ju

l-11

6-Se

p-11

1-No

v-11

27-D

ec-1

121

-Feb

-12

17-A

pr-1

212

-Jun-

127-

Aug-

122-

Oct

-12

27-N

ov-1

222

-Jan-

1319

-Mar

-13

14-M

ay-1

39-

Jul-1

33-

Sep-

1329

-Oct

-13

24-D

ec-1

318

-Feb

-14

15-A

pr-1

410

-Jun-

145-

Aug-

14

200250300350400450500550600650

Index

End of QE3 in the US.

Complicated by changing expectations of the timing and speed of US rate-hike cycle.

Strength of the major world economies.

Risk of a geopolitical shock.

When will the US raises interest rates?

QE 3(Sep12 -31Oct14)

QE1(Dec 08-Mar10)

QE2(Nov10-Jun11)

MSCI Asia ex-Japan index corrected both after end of QE1 and QE2

Source: Bloomberg


Foreign holdings in equity remain high

High foreign ownership of MGS and money market instruments

Foreign ownership of equity trending down

Susceptible to US interest rate hike

High foreign holdings of financial assets in Malaysia

Source: Bursa Malaysia; * estimatesSource: Bank Negara Malaysia

Ja

n-0

7J

ul-

07

Ja

n-0

8J

ul-

08

Ja

n-0

9J

ul-

09

Ja

n-1

0J

ul-

10

No

v-1

0J

an

-11

Ma

r-1

1M

ay

-11

Ju

l-1

1S

ep

-11

No

v-1

1J

an

-12

Ma

r-1

2M

ay

-12

Ju

l-1

2S

ep

-12

No

v-1

2J

an

-13

Ma

r-1

3M

ay

-13

Ju

l-1

3S

ep

-13

No

v-1

3J

an

-14

Ma

r-1

4M

ay

-14

Ju

l-1

4*S

ep

-1420

21

22

23

24

25

26

27

28

%

High foreign holdings of MGS and short-term money market papers


High foreign holdings of financial assets

Could weaken back to around MYR 3.30/USD or even exceeding that level temporarily in the short term.

When expectations of a US rate hike build up.

Will eventually strengthen back to around MYR 3.15/USD when the situation normalises, in our view.

Ringgit still susceptible to capital flow

* Up to August 2014; Source: Bank Negara Malaysia, Bursa MalaysiaSource: Bloomberg

MYR/USD: Recovered some lost ground before weakening back

2008

2009

2010

2011

2012

2013

2014*

0

10

20

30

40

50

60

70

80

90

20

21

22

23

24

25

26

27

MGS (LHS) Money market (LHS) Equity (RHS)

% %

Jan

-13

Ma

r-1

3

Ma

y-1

3

Jul-

13

Se

p-1

3

No

v-1

3

Jan

-14

Ma

r-1

4

Ma

y-1

4

Jul-

14

Se

p-1

42.902.953.003.053.103.153.203.253.303.35

MYR/USD

3.2585


Low risk of it falling into a deficit over the next 1-2 years.

Current account surplus in the balance of payments bouncing back with export recovery

Current account surplus in the balance of payments

Source: Department of Statistics Malaysia

05 06 07 08 09 10 11 12 13 140

5

10

15

20

25

30

35

40

45

-25

-20

-15

-10

-5

0

5

10

15

20

25

MYR bn % y-o-y

Exports(RHS)

Current accountbalance(LHS)


Slower economic growth in the 2H and 2015 is to be expected Real GDP growth accelerated to 6.3% y-oy in 1H2014, lifted by strengthening

export growth. Growth, though resilience, is envisaged to slow to 5.3% y-o-y in the 2H, but the

full year growth of 5.8% is still likely to be the strongest in the SEA region. 2015 growth is projected to be weaker at 5.3%

GDP by expenditure components (at constant 2005 prices)

MOF RHBRI 2012 2013 2014 (p) 2015 (f) 2014 (e) 2015 (f) 2016 (f) (% growth in real terms) Domestic demand1 10.6 7.4 6.4 6.2 6.4 5.8 6.1Consumption Public Consumption 5.0 6.3 2.1 3.8 4.0 3.1 3.9 Private Consumption 8.2 7.2 6.5 5.6 6.8 5.2 5.3Fixed capital formation 19.2 8.5 8.3 8.5 6.9 8.2 8.5 Public Investment 14.6 2.2 2.6 4.7 0.4 3.4 4.0 Private Investment 22.8 13.1 12.0 10.7 11.2 11.0 11.0Exports2 -1.8 0.6 3.5 2.1 4.5 4.8 4.4Imports2 2.5 2.0 3.5 4.0 4.8 6.4 5.0

Gross Domestic Product 5.6 4.7 5.5-6.0 5.0-6.0 5.8 5.3 5.5

1Excluding stocks 2Goods & non-factor services(p): Preliminary (f): Forecasts Source: Economic Report 2014/2015, Ministry of Finance


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Thank You


Key Contact Information

A member of the RHB Banking Group

RHB Research Institute Sdn Bhd

Lim Chee SingDL : +603 9285 9693Email : [email protected]

Alexander ChiaDL : +603 92077621

Email : [email protected]

Peck Boon Soon

DL : +603 9280 2163Email : [email protected]

Post Budget Economics Outlook - Peck Boon Soon, Head of Economics, RHB Research Institute

Economy & Finance

Transcript of Post Budget Economics Outlook - Peck Boon Soon, Head of Economics, RHB Research Institute