Committed to fiscal reforms

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The 1Malaysia People’s Aid (BR1M) assistance is expected to benefit 4.7m households and 2.7m single individuals, accounting for 55% of Malaysian households which earn less than RM4,000 per month.The 1Malaysia People’s Aid (BR1M) assistance is expected to benefit 4.7m households and 2.7m single individuals, accounting for 55% of Malaysian households which earn less than RM4,000 per month.The 1Malaysia People’s Aid (BR1M) assistance is expected to benefit 4.7m households and 2.7m single individuals, accounting for 55% of Malaysian households which earn less than RM4,000 per month.

Budget 2016, announced last Friday by the Prime Minister, is generally regarded by economists and analysts as a people friendly and market neutral.

Alliance DBS Research noted that given the limited fiscal space, Budget 2016 underlines the government’s commitments to contain expenditure, and prioritises spending on high-impact projects and alleviating the impact of rising cost of living on rural and lower-income households.

RHB Research likens the Budget to “Walking A Fiscal Tightrope”.

The main positive coming from the Budget announcement was the fiscal discipline displayed and the commitment to fiscal reform, striking a balance between fiscal sustainability and the need to support economic growth, said RHB.

“As expected, Budget 2016 was a demonstration of the Government’s commitment to following through with various infrastructure projects and building more affordable homes under various schemes,” it said.

To address the pressing issue of home ownership being affected by skyrocketing property prices, Budget 2016 continues to focus on the implementation of various affordable housing projects by several government agencies including Perumahan Rakyat 1 Malaysia (PR1MA) and Syarikat Perumahan Negara Bhd (SPNB). It will also establish a First House Deposit Financing Scheme under the Ministry of Urban Wellbeing, Housing and Local Government with a RM200m allocation. This is in addition to the Youth Housing Scheme and extension of 50% stamp duty exemption for first-home buyers until 31 Dec 2016, both of which were introduced in Budget 2015.

Alliance believes the affordable housing segment will remain resilient, underpinned by robust demand from genuine homebuyers. “However, there is no clear incentive for property developers in Budget 2016 to tackle the soft property market in Malaysia which has witnessed weaker take-ups and slower loan approvals. Developers have been facing difficulty in converting their initial high bookings to sales because of strict bank lending as banks get more cautious towards the property sector despite keen interest by potential homebuyers.”

The biggest surprises from the Budget 2016 announcement were the hike in tax rate for higher income earners and the increase in minimum wages, highlighted CIMB Research.

For those earning an annual income of between RM600,000 and RM1m, the tax rate will be raised to 26% from 25%. For those earning above RM1m, the tax rate will be increased to 28% from 25%.

“The increase in personal tax rate for the high income earners is unprecedented and will increase the burden of taxes paid by high income earners,” said CIMB.

“The country’s effective tax rate is already high when compared with countries such as Singapore and Hong Kong. This move could result in a setback in the country’s effort to retain talents and advance up the value chain,” echoed RHB.

Meanwhile, the hike in minimum wage effective from 1 Jul 2016 will push up labour cost for various industries. 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 will increase operating costs for labour-intensive industries such as plantations, construction and manufacturing. The impact on the bottomline is likely to be more muted for the construction sector as the average labour cost is already RM1,000-1,200 per month,” noted CIMB.

There were no positive surprises in infrastructure spending as Budget 2016 mostly regurgitates previously announced projects, most of which will be funded off balance sheet. What is positive is that the government is encouraging businesses to invest by giving various tax incentives, said Alliance.

“We remain encouraged by the government’s commitment to these key projects. More importantly, we think these projects appear to be making progress…However, the uncertain global macro environment may dampen businesses’ appetite for capital spending at this juncture,” it added.

Analysts are disappointed by the lack of measures in the 2016 Budget to support the Ringgit. The currency had suffered a freefall after it broke the psychological level of MYR3.80/USD, falling from MYR3.82/USD on 3 Aug to MYR4.30/USD on 26 Aug and a near 1997/1998 currency crisis low of MYR4.48/USD on 29 Sep.

“Although the currency has since recovered somewhat and climbed to RM4.22/USD after the US Federal Reserve failed to raise interest rates in September – expectations now are for a delay into 2016 – while the drop in the current account surplus was not as bad as feared, it remains weak and vulnerable to capital outflow,” said RHB.

The general view is that on the whole, the government’s budget measures – coupled with a modest increase in development expenditure as well as the ongoing implementation of initiatives under the Economic Transformation Programme (ETP) and infrastructure projects announced in the 2016 Budget – appear relatively mild in boosting private investment and economic growth in 2016.

CIMB concluded: “Broadly speaking, the consumer, construction, education, real estate investment trusts (REITs), healthcare and telco sectors are winners in this budget.” (Please see table.)

Budget 2016 impact on sectors

Budget 2016 impact on sectors

The increase in civil servants’ salary will benefit 1.6m civil servants. The 1Malaysia People’s Aid (BR1M) assistance is expected to benefit 4.7m households and 2.7m single individuals, accounting for 55% of Malaysian households which earn less than RM4,000 per month.

CIMB believes the increased salary and improved benefits for civil servants (to impact 1.6m civil servants), increased amount of BR1M payments (to benefit 4.7m households and 2.7m single individuals), and higher amount of minimum wage are definitely positive for the consumer sector.

“With Malaysian consumer sentiment still low due to the GST implementation and rising living costs, these measures and incentives are expected to increase lower-income households’ disposable income and boost overall consumer spending, which we believe will lead to improved consumer confidence in 2016,” said CIMB.

However, RHB cautioned that despite measures to ease the cost of living, there was still a high chance that consumer spending may not sustain at the strong 6.4% growth as projected by the Ministry of Finance (2015 estimate: +6.8%).

“Consumer spending is likely to be weighed down by rising price pressure, sharp depreciation in the Ringgit, high household debt servicing, and the modest increase in income,” it said.

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