DBS Focus Malaysia: Beyond the election and politics

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1 Economics DBS Focus Malaysia: Beyond the election and politics Group Research 4 May 218 Irvin Seah Senior Economist In the previous election in 213, PM Najib s coalition won 133 out of a total of 222 parliamentary seats but secured only 47.38% of the popular vote. In recent years, issues such as the 1MDB scandal, as well as the introduction of an unpopular Goods and Services Tax (GST), have complicated matters for the incumbent government. Economics versus politics Please direct distribution queries to Violet Lee violetleeyh@dbs.com Despite the politically charged climate, economic fundamentals are stronger on multiple fronts today compared to the previous election. This could work in the ruling party s favour. Key Themes: Malaysia s general election on 9 May will be keenly watched by investors Despite the politically charged climate and the tense build-up to the poll, Malaysia s underlying economic fundamentals have been encouraging Growth momentum is stronger today compared to the previous election. The near-term outlook is positive, supported by sanguine private consumption and investment growth The GST and inflation have been pain points for most voters, but the outcome is stronger fiscal health, which is crucial for longer term economic stability Investors will be looking forward to policy continuity which will be crucial to ensuring economic stability after the election Election 218 Malaysia is headed for a hotly contested general election on 9 May. The incumbent government, led by Prime Minister Najib Razak, will be challenged by the opposition coalition led by former Prime Minister Dr Mahathir Mohamad. Malaysia: GDP growth stronger % GDP growth registered 5.9% in 217, up from the commodity-/oil-driven slump in the preceding two years and significantly stronger than the 4.7% in 213. While expected to be a tad slower at -5.5%, this year s growth will be more broad-based and led mainly by robust domestic growth. Robust consumption Private consumption is the biggest driver of growth in Malaysia. The drag from the GST implemented in April 215 has since dissipated, with a slew of offset measures (i.e., BR1M handouts) helping to ease the pain of consumers Refer to important disclosures at the end of this report

2 Private consumption growth % YoY 9. Impact of GST on consumption Broad-based expansion in 4Q17 %YoY, %-pt contribution 8 Net exports Pvt consumption GDP growth Investment Govt spending 4. Latest: 4Q Latest: 4Q17 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 The generosity in the last fiscal budget also added some short-term support for private consumption. Total budget allocation increased by 7.5% to MYR 28.25bn for FY18, up from MYR 26.8bn previously. Subsidies and the social assistance scheme, which accounts for 11.3% of total operating expenditure, is projected to rise by 15% after two consecutive years of declines. Beyond the near term, private consumption growth is expected to continue to ride on an improved employment outlook and healthy growth momentum. The unemployment rate has dipped back to a multi-year low of 3.2% in February 218 while employment growth has risen above 2%. The feedback loop between growth and employment, with resulting wage gains, should lift consumer sentiment, essential for continued robust consumption growth. Employment prospects brightening up %, sa % YoY 3.7 Employment growth Unemployment rate Latest: Feb18 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan Strong investment outlook Many development projects have, following the plunge in oil prices in , been put on hold in the past three years to maintain fiscal sustainability. This has changed since late 216 on the recovery in oil prices. Some of the key infrastructure projects such as the MRT 2, LRT 3, the high-speed rail linking Kuala Lumpur and Singapore, the East Coast Railway line, the Tun Razak Exchange etc.., are now running at full steam. Participation of Chinese companies have also risen significantly for some of the infrastructure projects, thanks to China s Belt and Road Initiative (BRI). Indeed, Malaysia is a key BRI partner under PM Najib [1]. For the record, China has been Malaysia s largest trading partner for almost a decade, with bilateral trade volume reaching USD73bn in 217. It is now the country's main construction contractor and importantly, the biggest contributor in terms of FDI inflows. While its neighbour, Singapore, remains the biggest investor in terms of share, China contributes the most in terms of the growth in FDI flows. Total FDI into Malaysia grew USD9.1bn between 213 and 217; China alone contributed 2.2% of that increase. Foreign Direct Investment (FDI) by source % share % chg % contri to Sources of FDI USD (217) (217) (213/17) grth Singapore Netherlands Japan US Hong Kong China UK Germany Page 2

3 Overall, Malaysia is back on the radar screen of foreign investors. As such, investors would certainly be looking forward to Malaysia carrying on its current progressive policies, especially those pertaining to foreign investment and economic transformation, after the election. GST and inflation The rising cost of living has been a bugbear of the ruling party. The introduction of the GST and the earlier move to abolish fuel subsidies (December 214) were often cited as the key causes of inflation in recent years. Inflation spiked to a high of 4.2% YoY in February 216 and again to 4.9% in March 217. Inflation outlook % YoY 4. Cut in fuel subsidy and GST CPI inflation MYR/USD Recovery in oil prices MYR/USD % Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Yet, inflation has been easing over the past year, and fell to a low of 1.3% YoY in March 218. More importantly, we reckon that the price effects on inflation from the fuel-subsidy cuts have been transient and the impact probably had dissipated by the latter part of 216. In addition, the run-up in oil prices in 217 has also created a high base that has been weighing on inflation in recent months. Moreover, the strong correlation between MYR movements and inflation during this period seems to suggest that imported inflation resulting from the currency depreciation may have in part contributed to domestic price pressures. So, the GST and the fuelsubsidy cuts are not solely responsible for the high cost of living, particularly when their effects are transient in nature and offset measures in response to these two fiscal policy moves were introduced. A weak currency has a role to play too The fiscal position has strengthened Despite their unpopularity, the decisions to abolish fuel subsidies and introduce the GST have been largely positive for the fiscal position. Fiscal deficit is projected to fall to 2.8% of GDP in FY18 from 3.8% in the last election. Government debt has since improved markedly, within a short period, from its 55.6% peak in mid-215 to 5.8% as of end-217. Malaysia s reliance on petroleum-related tax has also more than halved to 9% of total tax revenue from 27% between FY12 and FY17. This has helped buffer Malaysia s fiscal position against the volatility in global energy prices. Concomitantly, the intake from the GST has risen to a whopping 25% of total revenue since its introduction. The GST is now the second-largest contributor to the fiscal coffer behind corporate income tax (36.3%). Fiscal position has strengthened % of expenditure % of revenue 25 Petroleum related tax 3 GST Subsidies (LHS) Fiscal deficit and debt falling % of nom. GDP % of nom. GDP Fiscal deficit to GDP Debt to GDP (RHS) Page 3

4 Overall, Malaysia has made significant progress on the fiscal front. This has put the incumbent government in a very strong position to implement the next phase of economic transformation under the 11 th Malaysia Plan (11MP). implementation of her economic transformation strategies as well as continuity of many of her more progressive policies will be crucial to its longer-term outlook. Both internal and external stakeholders will be looking to the next government in this respect. Continuity of transformation strategies is crucial Politics is often controversial, and election outcomes can be unpredictable. But beyond the election and political uncertainties, Malaysia has made significant progress over the year in terms of ensuring growth stability and fiscal sustainability. In this context, effective Footnote: [1] see DBS report Understanding China BRI tactics for Southeast Asia Page 4

5 Group Research Economics & Strategy Team Taimur Baig, Ph.D. Chief Economist - G3 & Asia taimurbaig@dbs.com Nathan Chow Strategist - China & Hong Kong nathanchow@dbs.com Joanne Goh Regional equity strategist joannegohsc@dbs.com Neel Gopalakrishnan Credit Strategist neelg@dbs.com Eugene Leow Rates Strategist - G3 & Asia eugeneleow@dbs.com Chris Leung Economist - China & Hong Kong chrisleung@dbs.com Ma Tieying Economist - Japan, South Korea, & Taiwan matieying@dbs.com Radhika Rao Economist - Eurozone & India radhikarao@dbs.com Irvin Seah Economist - Singapore, Malaysia, & Vietnam irvinseah@dbs.com Samuel Tse Economist - China & Hong Kong samueltse@dbs.com Duncan Tan FX and Rates Strategist - Asean duncantan@dbs.com Philip Wee FX Strategist - G3 & Asia philipwee@dbs.com Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore Tel: Company Registration No E. Page 5