Dr. Mohd Afzanizam Abdul Rashid Chief Economist 03-2088 8075 afzanizam@bankislam.com.my Budget 2017 Preview: A Delicate Balancing Act Fiscal consolidation themes continues The Budget 2017 will be announced on 21 October, 2016. The theme will be Accelerating Growth, Fiscal Prudence, Enhancing Wellbeing of People. This would simply mean the government is not about to lose its sight on their austerity drive. At the same time, keeping Malaysian citizen welfare in good state will continue to be at the forefront especially when dealing with escalating cost of living as well as providing affordable houses to the middle and low income group. In our view, reducing fiscal deficits from an estimated 3.1% of GDP in 2016 to 3.0% in 2017 can be an uphill task particularly when the economy is expected to grow below its potential level. Therefore, effective communication is critically important especially when there could be a sudden turn of event which may compromise revenue collection. This is to ensure all the stakeholders such as the rating agencies, businesses, investors and households are all on the same page. In addition, focus should be given on non fiscal measures which will help to reduce operating expenditure. Accelerating the implementation of infrastructure is also paramount as this will allow the economy to grow at a respectable speed. Chart 1: Fiscal balance as percentage of GDP 0.0% -1.0% -0.60% -2.0% -3.0% -4.0% -5.0% -4.6% -4.7% -4.3% -3.8% -3.4% -3.2% -3.1% -3.0% -6.0% -5.3% -7.0% -6.7% 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F Sources: CEIC & 11MP For Internal Circulation Page 1
Chart 2: Government debt as percentage of GDP 60.0% 55.0% 50.0% 45.0% 40.0% 53.4% 53.0% 52.7% 54.5% 51.6% 50.8% 50.0% 49.6% 45.7% 45.1% 43.0% 42.1% 41.3% 40.6% 40.1% 39.8% 43.50% 35.2% 35.0% 30.0% Y00 Y01 Y02 Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10 Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 Y20 Some reality check Sources: CEIC & 11MP The 1H2016 fiscal deficits stand at RM32.8 billion or 5.6% of GDP. Such performance is higher than RM38.5 billion or 3.1% of GDP as indicated in the recalibration of Budget 2016 (announced in January this year). In view of such target, 2H2016 fiscal deficits need to be reduced to RM5.7 billion or 0.9% of GDP. This would mean revenue collection must grow by 8.3% y-o-y to RM121.6 billion while operating expenditure would need to be cut by 7.3% to RM101.7 billion. Nonetheless, net development expenditure can still grow albeit at smaller pace by 6.1% to RM25.6 billion (see Table 1). Table 1: Federal government finances RM billion 1H 2015 2H 2015 1H 2016 2H 2016* Revenue 106.8 112.3 96.3 121.6 Y-o-Y% 4.9% -5.5% -9.8% 8.3% Operating expenditure 107.3 109.7 109.5 101.7 Y-o-Y% 0.3% -2.6% 2.1% -7.3% Current account (0.5) 2.5 (13.2) 19.9 Gross development expenditure 15.3 25.4 20.1 25.9 Y-o-Y% 7.1% 1.0% 31.0% 1.9% Less: Loan recoveries 0.2 1.3 0.5 0.3 Net development expenditure 15.1 24.1 19.6 25.6 Y-o-Y% 8.3% -1.3% 29.4% 6.1% Overall Balance (15.6) (21.6) (32.8) (5.7) Overall balance % of GDP -2.8% -3.6% -5.6% -0.9% *We take the difference between the full year target and 1H2016 actual numbers Source: CEIC & MOF While 1H2016 outturn was quite worrisome, the monthly releases on fiscal balances may provide some relief. In August, the government recorded a fiscal surplus balance of RM2.4 billion while in July, the deficits level were much smaller at RM106 million compared to RM6.8 billion deficits in June (see Chart 3). For Internal Circulation Page 2
This was made possible when revenue jumped to RM23.6 billion in August, giving 26.9% increases over the same period last year. Total expenditure rose to RM21.2 billion during August. However, the gain was only 2.5% y-o-y. It appears that there could be some timing issues particularly on Oil & Gas related revenue such as petroleum royalty which normally received during the 1Q and 3Q of the year. Apart from that, dividend from Petronas amounting to RM6 billion has been received in the 1H2016. It would mean another RM10 billion should be paid given Petronas commitment to pay RM16 billion in total dividend for 2016. This looks achievable as Brent crude oil prices are currently hovering above USD50 per barrel and the recent news on OPEC to reduce oil production between 32.5 million barrels per day (mbpd) and 33.0 mbpd could provide support to the prevailing oil prices. Revenue collection from GST was quite encouraging too with 1H2016 collection amounting to RM17.2 billion, which is higher compared to SST collection of RM17 billion in 2014. Chart 3: Monthly fiscal balance in RM Million 4,000 2,000 2,417 - (2,000) (1,413) (749) (106) (4,000) (6,000) (8,000) (6,340) (7,506) (6,764) (10,000) (9,982) (12,000) Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Source: CEIC & Bank Islam Budget 2017 proposals: what we heard so far 1. Increase in Bantuan Rakayat 1 Malaysia (BR1M) payment Looking at the BN s general election manifesto, the BR1M payment will be increased to RM1,200. In Budget 2016, households with monthly income of RM1,000 and below, will receive RM1,050 which will be paid in every three months. While households whose earnings are RM3,000 and below, BR1M payments was raised from RM950 to RM1,000 (see Table 2). We expect the government would want to raise it again as issues surrounding escalating cost of living continue to make headlines. While such move could help to alleviate financial burden, albeit to a certain degree, unconditional transfers would make such scheme counterproductive in the long term. In particular, it can be a moral hazard as people will continue to rely on cash assistance from the government with no assurance of productivity gains. Perhaps, the government should put certain condition whereby the recipient need to go for training in order to equip them with a proper skill before receiving such aid. That way, it will encourage the low income households to improve themselves and become more productive to the society and the country. For Internal Circulation Page 3
Table 2: BR1M as announced in Budget 2016 Budget 2016 Income range BR1M Increment Below RM1,000 RM1,050 RM3,000 and below RM1,000 RM50 RM3,001 - RM4,000 RM800 RM50 Single indv aged 21 > but income < RM2,000 RM400 RM50 Bereavement Scheme RM1,000 Total beneficiaries # of households 4.7 million # of single indv. 2.7 million Total allocation RM5.9 bn Source: Budget 2016 Speech 2. Unemployment Insurance There were several occasions whereby unemployment insurance was in mentioned. However, there was no concrete announcement as to how and when it will be implemented. From our channel check, the government would announce such measure in the upcoming Budget 2017. The insurance premium will be borne by the employers and the employee, which could be as low as RM5 per month. While the coverage would be up to RM4,000 per month in the event of layoffs. The details are still sketchy at this stage. However, we applaud such move as this will improve the social safety particularly during higher unemployment rates. 3. Extension of tax amnesty period During the recalibration of Budget 2016 which was announced in January this year, the government has given special consideration to relax penalty charges to taxpayers to come clean and declare their past year s income. As it is, the tax arrears need to be settled before 31 December 2016. We are unsure as to the success rate of this program. However, in Indonesia, the tax amnesty measure has received good response from the taxpayers. As of September 2016, the Indonesian government has collected a total IDR22.7 trillion when the program started in July this year. Perhaps, the Malaysian government may want to extend it into 2017 in order to encourage more taxpayers to come forward. 4. Raising EPF Account 2 from 30% to 40% to allow members to withdraw more for housing down payment It was reported in the news that raising the EPF member s account 2 from 30% to 40% could help potential homebuyers to own a house. We understand such proposals are still being discussed and there is no formal decision as yet. For Internal Circulation Page 4
Regardless, we supported the measures as home values tend to appreciate over time. Therefore, lack of retirement savings as a result of this measure will be offset by the rise in house prices in the future. 5. Increase MyDeposit from the current allocation of RM200 million The Prime Minister has announced during Budget 2016 to establish First House Deposit Financing Scheme under KPKT with total allocation of RM200 million. The scheme is to help the first time house buyer to come up with the down payment when they purchase a house. Based on our conversation with developer, such allocation has been fully taken up by the house buyers. As such, it does make sense to upsize the scheme in view of positive response from the Malaysian citizens. 6. End financing provided by developers We should expect more clarity on this measure during the Budget 2017. There has been mixed views on this since it was out in the news on 8 September. The KPKT minister, Tan Sri Noh Omar indicated that his ministry has agreed to grant money lending licenses to the qualified developer under the Money Lenders Act 1951. Such measure is to assist house buyers who are having difficulties to secure end financing from the bank. Our own wish lists As mentioned, the government has limited means to introduce tax incentives as well as additional spending given their commitment to reduce the budget gap. As such, our own wishlists stems from this notion whereby the government should give priority on non fiscal measures that has significant impact over the long term. 1. To allow access for CCRIS report via BNM s website We noticed that issues relating to cost of living and getting home financing are closely related to financial management. Based on AKPK s latest statistics, the number one reasons for debt problems are financial mismanagement which accounted for 50.8 percent of the total response (see Chart 4). In this regard, allowing access to Central Credit Reference Information System (CCRIS) report via BNM s website to potential or existing borrowers would help individuals keeping a close tab on their financial standing. We believe that a handful of borrowers or potential borrowers may not have seen their own CCRIS report and it only come to their knowledge the moment they apply for financing facility with a bank. By granting such access, it would make the borrowers aware on the need to maintain a good repayment trend while at the same time, maintaining a healthy level of Debt Service Ratio (DSR) in order to improve their success rate when applying for a financing facility. For Internal Circulation Page 5
Chart 4: Reasons for default / debt problems as of July 2016 Lost job/retrenched 9.80% High cost of living 9.60% Misc. 3.10% High medical expenses 11.50% Financial mismanagement 50.80% Failure/slowdown in Business 15.20% Source: Agensi Kaunseling dan Pengurusan Kredit (AKPK) 2. Tax incentive for Waqaf We see Waqaf as the next big thing for Islamic Finance given that it may compliment to the existing economic policy. However, incentives for Waqaf are still lacking given it is not listed as donations or gifts which would qualify for tax deduction. Perhaps, it is high time to give some form of incentive for Waqif (Donator) so that Waqaf especially cash Waqaf can be collected and reach its economies scale in the immediate terms. The way we see it, Islamic Economy / Finance has evolved from a struggle to avoid Riba to inculcating risk-sharing spirit when the BNM introduce IFSA 2013. Going forward, harnessing the act of charity by way of Waqaf or Sadaqah house need to be spearhead given its significant potential to be part of economic policy instrument which can benefit the whole society irrespective of religion and race. 3. Extension of Special Reinvestment Allowance The government has announced Special Reinvestment Allowance (SRA) to replace the Reinvestment Allowance which already expired last year. Under SRA, the rate claim is at 60% of the qualifying capital expenditure and is allowed to be set off against 70% of statutory income from year assessment (YA) 2016 to 2018. Therefore, to further promote reinvestment activities among existing companies in the manufacturing and agriculture, the SRA could be extended beyond YA2018. We see this as important step to increase automation and mechanization which then could subsequently reduce dependencies over unskilled foreign labour. For Internal Circulation Page 6
Conclusion In a nutshell, the federal government has limited means to prescribe additional incentives or spending given the government s commitment to reduce fiscal deficits which we foresee to be around 3.0% of GDP in 2017 from 3.1% in 2016. Despite that, the budget is deemed to be expansionary given that expenditure is still higher than revenue and hence, the terms deficits. In this regard, development expenditure is critical in driving growth given its association with infrastructure projects and the spillover effects it has on other sectors such as construction, manufacturing and services. Continuous reduction in deficit is good for confidence building as Malaysia s sovereign rating will remain unchanged at A3/A-. This will ensure a steady flow of funds from abroad thereby providing sustainability and stability in our yield curve (see Chart 5 & 6) In addition, effective communication is also paramount in order to ensure a buy-in from various stakeholders. To this end, ensuring uniformity in communication of government policy via engagement with the public, businesses and analysts/economists community would result a proper flow of information and interpretation. Chart 5: Yield-to-Maturity (YTM) Malaysian Government Securities (MGS) 4.50 4.30 4.10 3.90 3.70 3.50 MAGY10YR Index MAGY3YR Index MAGY5YR Index Chart 6: Yield-to-Maturity (YTM) Government Investment Issue (GII) 4.7 4.5 4.3 4.1 3.9 3.7 3.5 3.30 3.10 2.90 3.3 3.1 2.9 MGII10Y Index MGII5Y Index MGII3Y Index 2.70 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Source: Bloomberg 2.7 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Source: Bloomberg For Internal Circulation Page 7
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