The Malaysian government has pledged to put the economy on a sustainable growth path while undertaking steps aimed at reducing the country’s budget deficit, a move widely expected by the market.
Budget 2014 contains spending cuts and subsidy discipline that would ultimately contribute to a reduction in government debt. This year’s Budget focussed primarily on fiscal consolidation towards gradually reducing the budget deficit to the targeted 3.5% of GDP for 2014 (2013: 4% of GDP). This would form part of the roadmap to achieve a balanced budget even before 2020. Malaysia recorded a budget deficit of 4.5% of gross domestic product (GDP) in 2012, and a shrinking current account surplus of RM2.6 billion in the second quarter of 2013. The surplus is estimated to narrow to RM26.6 billion this year from RM57.3 billion in 2012.
Apart from the fiscal discipline objective, Budget 2014 strives to sustain healthy GDP growth and improve living standards of the “rakyat”.
The following are pertinent issues that were addressed:
Goods and Services Tax (GST)
Set at 6% with basic food items such as rice, flour, and cooking oil exempted, the GST would be effective 1 April 2015 to replace the current sales tax of 5%-10% and service tax of 6%. This rate is the lowest in ASEAN countries. The government would also provide one-off payment of RM300 to households eligible for the 1Malaysia People’s Aid Programme (BR1M) upon implementation of GST.
It is clear the implementation of GST is positive for the economy, as it broadens the tax base and is a fairer and equitable tax. However, from an equity market’s perspective, it will have limited near term impact given its long dated implementation. It does however augur well for the government’s efforts on fiscal prudence. The GST would lessen strain on Malaysia’s fiscal deficit and provide a more efficient tax regime.
Income Tax (Corporate and Personal)
Introduction of the GST would imply a revision to the corporate (currently 25%) and personal (26% for top bracket) income taxes. As such, this is timely with corporate taxes being lowered to 24% and personal tax rates reduced by 1%-3% that will take effect post GST. The reduction in corporate tax rates would eventually lead to higher tax revenues because the lower cost of doing business would tend to encourage business growth.
Costs of Living
Middle-income earners are the worst hit population segment by rising costs of living, and were previously not entitled to the BR1M Programme meant for those with a household income of RM3,000 and below. The government has raised the BR1M payment to its target recipients by: increasing cash handouts (to RM650 from RM500 previously), and making more households eligible (RM4,000 monthly income from RM3,000 previously). Families with RM4,000 monthly incomes will not be subject to income tax, while middle-income households would also receive tax exemption of RM2,000.
Strengthening Financial Market
Amendments will be made to existing laws and Bank Negara Malaysia will lead the initiative in formulating the Netting Act to protect enforcement rights of “close-out netting” under the financial contract. This is to reduce credit risk and promote a healthier derivatives market, reducing systemic risks in the domestic financial market as well as the cost of doing business. Currently, the domestic bond market is the largest in Southeast Asia with a value exceeding RM1 trillion, while daily transactions in the foreign exchange and money markets are more than RM30 billion.
The government has proposed a one-off incentive of RM500 to contributors who participate in the Private Retirement Scheme (PRS) scheme with a minimum cumulative investment of RM1,000 within a year. This measure is designed to promote the PRS market. This incentive – available for individuals aged between 20 and 30 years – is expected to attract 420,000 youth contributors nationwide, and will be implemented from 1 January 2014, for a period of 5 years, involving an allocation of RM210 million.
Short Term Impact on Equity Market
The Malaysian equity market has been firm in the last 1-2 months. This is partly a reflection of regional market strength. The market has factored in the positive effects of the budget. Hence, we believe post-budget, action for the equity markets will be neutral as shorter term investors take profit on news, countering any positive impact of the budget.
With the strong political mandate, the government is implementing tougher and more sensible policies for nation building. But successful implementation of those policies will largely depend on execution discipline, which the government seems to have a greater appreciation of the expectations of the Rakyat. Also, top government officials and corporate figures will be going to the US to meet global funds in the Invest Malaysia roadshow shortly after the Budget.
Overall, we believe the budget is a step in the right direction from a market perspective. Despite the neutral impact of the budget, we are still quite bullish on the market. We believe a return of global growth and the delay in Quantitative Easing (QE) tapering by the US Federal Reserve will provide impetus to drive the market higher by year end. By historical standards, valuations are not excessive and foreign positioning in the market is relatively low. As such, we remain bullish and continue to increase our exposure in the market.