Mohd Afzanizam Abdul Rashid Chief Economist 03-2088 8075 afzanizam@bankislam.com.my Budget 2015 towards a balanced budget 1.0 Introduction The Budget 2015 was unveiled yesterday with a theme People Economy. A total of RM273.9 billion was budgeted for 2015 and this represents an increase of RM9.8 billion from 2014 initial allocation. There are seven strategies which will serve as a guiding principle for the implementation of budget initiatives. It ranges from economic growth, fiscal governance to the well-being of rakyat. In a nutshell, it is a sensible budget as the government remains committed to adhere its austerity measures namely the implementation of Goods and Service Tax (GST) implementation and subsidy rationalisation programme. Chart 1: Government revenue and funding sources in 2015 Borrowings and use of government's assets, 13.5% Indirect tax, 17.6% RM271.9 bn Income tax, 46.9% Non-tax revenue, 19.1% Other direct tax, 2.9% Chart 2: Government expenditure in 2015 Operating Other expenditure, expenditure 12.5% Subsidies, 13.9% Economic, 10.8% Development Social, 2.6% expenditure Security, 1.8% General administration, 0.6% Grants and transfers to state governments, 2.7% Pension and gratuities, 6.0% RM271.9 bn Emoluments, 24.1% Supplies and services, 14.0% Debt service charges, 9.0% For Internal Circulation Page 1
2.0 Macroeconomic forecast Looking at the Economic Report 2014-15, it clearly shows that the government remain mindful of their financial standing with budget deficits are expected to be narrowed further to RM35.7 billion or 3.0% of GDP in 2015. This was made possible by higher revenue growth coupled with slower growth in total expenditure. The Goods and Services Tax (GST) which is slated to be implemented on 1 st April 2015 is likely to bring in RM21.7 billion to government coffers. This is much higher compared to Sales and Services Tax (SST) collection of RM17.8 billion in 2014. Meanwhile, operating expenditure is anticipated to increase at a snail pace of 1.1% as government is expected to reduce further in subsidy bills amounting to RM37.7 billion in 2015 (2014: RM40.6 billion). Of particular interest is the sharp increase in net development expenditure by 15.0% during 2015 to RM47.5 billion. Economic sector received the lion share for development expenditure amounting to RM29.3 billion. This will spearhead projects in the five corridors, improving access and connectivity of urban public transport, construction and upgrading of roads, bridges, railways and airports as well as better coverage of electricity and water supply. Table 1: Federal government finances RM Million 2011 2012 2013 2014F 2015F Revenue 185,419 207,913 213,370 225,094 235,219 % change 16.1 12.1 2.6 5.5 4.5 Operating expenditure 182,594 205,537 211,270 221,112 223,440 % change 20.4 12.6 2.8 4.7 1.1 Current balance 2,825 2,376 2,100 3,982 11,779 Net development expenditure 45,334 44,327 40,684 41,273 47,467 % change (11.6) (2.2) (8.2) 1.4 15.0 Overall balance (42,509) (41,951) (38,584) (37,291) (35,688) Overall balance % of GDP (4.8) (4.5) (3.9) (3.5) (3.0) Chart 3: Subsidy expenditure (RM billion) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 44.1 43.3 40.6 37.7 35.2 36.3 20.3 23.1 13.4 10.1 10.5 4.8 4.6 5.8 3.7 2.7 Y00 Y01 Y02 Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10 Y11 Y12 Y13 Y14f Y15f For Internal Circulation Page 2
The government indicated a range forecast of between 5.0% and 6.0% for 2015 GDP. Such projection suggests the extent of economic uncertainty next year following the implementation of GST as well as the ongoing subsidy rationalisation programme (SRP) is likely to have a serious toll on consumer spending. In this regard, the Consumer Price Index (CPI) is expected to increase between 4.0% and 5.0% in 2015 from around 3.3% in 2014. The recent 20 cents increase in RON95 and diesel prices on October 2 have resulted RM4 billion savings to the government. Therefore, the government is envisaged private consumption to grow at moderate pace of 5.6% in 2015 from an estimated 6.5% in 2014 while real exports is expected to decelerate to 2.1%, implying that multiple speed recovery in the advanced countries may not bodes well for Malaysia s growth in 2015. The latest forecast by the International Monetary Fund (IMF) on global growth suggests that the world economy would grow at 3.8%, lower from July s estimates of 4.0%. The recent interest rate cut to almost at zero rate by the European Central Bank (ECB) coupled with the ongoing geopolitical risks in Ukraine and Middle East have cast doubt whether the strength in the US economy would do the trick to lift global growth into higher trajectory. In addition, property price correction in China combined with their government efforts to shift the growth engine from investment to consumption led growth would result GDP growth lapsed into lower trajectory. Table 2: Gross domestic product (GDP) Growth 2011 2012 2013 2014e 2015f GDP 5.2% 5.6% 4.7% 5.5% -6.0% 5.0% - 6.0% Demand side: Domestic demand 6.8% 10.7% 7.4% 6.4% 6.2% Consumption 5.3% 7.5% 7.0% 5.6% 5.3% -Private 3.4% 8.2% 7.2% 6.5% 5.6% -Public 1.9% 5.0% 6.3% 2.1% 3.8% Investment 1.5% 19.2% 8.5% 8.3% 8.5% -Private 1.2% 22.8% 13.1% 12.0% 10.7% -Public 0.3% 14.6% 2.2% 2.6% 4.7% Real exports 4.5% -1.8% 0.6% 3.5% 2.1% Real imports 5.4% 2.5% 2.0% 3.5% 4.0% Supply side: Agriculture 5.8% 1.3% 2.1% 3.8% 3.1% Mining -5.4% 1.0% 0.7% 0.7% 2.8% Manufacturing 4.7% 4.8% 3.5% 6.4% 5.5% Construction 4.7% 18.6% 10.9% 12.7% 10.7% Services 7.1% 6.4% 5.9% 5.9% 5.6% For Internal Circulation Page 3
3.0 What we think about the Budget 2015 measures? i. New fuel subsidy system The government indicated their intention to introduce the new fuel subsidy system which will be announced in due course. This is essentially our top priorities since GST related measures have been dealt in the last budget announcement. We really hope that the fuel prices will be floated against the market price and subsidy will be given based on the income level. ii. GST The government have made it clear that the retail sale of RON95 petrol, diesel and LPG to be given relief from the payment of GST. In addition, the government has agreed electricity consumption that is not subject to GST be increased from the first 200 units to 300 units. Apart from that, the government has widened the scope of items that will not be subjected to GST such as reading materials such as children books and newspapers as well as medicines for heart failure, diabetes, hypertensions, cancer and fertility treatment. Such measures will alleviate concern among the general public on GST. iii. Small and Medium Enterprise (SME) There have been more deliberate measures to enhance the viability of SME businesses through better access to financing. This includes the setting up a Services Sector Guarantee Scheme amounting to RM5 billion for SMEs in the services sector. The scheme is expected to benefit 4,000 SMEs with a maximum RM5 million and 70% guarantee. In addition, Lembaga Tabung Haji (LTH) will allocate RM200 million for the establishment of Shariah-compliant Restricted Investment Account (RIA) under Bank Islam. This account will provide financing between RM50,000 and RM1 million from January 2015. iv. More infrastructure projects There will be several construction projects slated to be implemented in 2015. These includes a) construction of the 59-km Sungai Besi-Ulu Klang Expressway (SUKE) with a total cost of RM5.3 billion b) construction of the 276-km West Coast Expressway from Taiping to Banting at a total cost of RM5 billion c)construction of the 47-km Damansara Shah Alam (DASH) for a total consideration RM4.2 billion d) construction of the 36-km Eastern Klang Valley Expressway (EKVE) at a cost of RM1.6 billion and many more. These projects will be the key catalysts for public and private investment which, in turn, will sustained the pace of domestic activities while consumption growth moderated. For Internal Circulation Page 4
v. Affordable houses House ownership campaign continues with more measures targeted at the affordable units. This includes 80,000 units under the 1Malaysia People s Housing Programme (PR1MA) with an allocation RM3 billion. In addition, the ceiling of household income to purchase such houses is raised from RM8,000 to RM10,000. National Housing Department (JPN) to build 26,000 units under the people Housing Programme (PPR) with an allocation RM644 million and Syarikat Perumahan Negara Berhad (SPNB) to build 12,000 units of Rumah Mesra Rakyat (RMR) and 5,000 units of Rumah Idaman Rakyat. vi. Tax incentives for Islamic banking products Investment Account Platform (IAP) will be introduced in 2015 which will provide opportunities for investors in financing the entrepreneurial activities and developing SMEs. As such, the government proposes individual investors be given income tax exemption on profits earned from qualifying investment for three consecutive years. This will entice potential investors to part take in IAP since the investment principle is not guaranteed. 4.0 Concluding remarks We are convinced that the government is serious to reduce the budget gap and the implementation of GST and SRP is very instrumental in achieving such goal. However, the key risks to such economic reforms lies with the implementation of such policy. The provision of legal recourse such as Price Control and Anti Profiteering Act 2011 must be adhered and followed by strong enforcement. Otherwise, disposable income among average Malaysians will be under serious threats as prices will go up beyond imagination. In this regard, we foresee BNM would be less inclined to use Overnight Policy Rate (OPR) as a means to reduce the inflationary pressures in 2015 as the source of price increases are purely from cost adjustment. And the second round effect looks quite remote at this juncture as businesses will remain mindful of their overall costs structure. Sectors such as construction and oil & gas still look favourable, despite weakening in some parts of domestic engine, namely private consumption. The 2.8% increase in mining output during 2015 will be spearheaded by the commencement of production from new oil fields such as Gumusut-Kakap Deepwater and Kebabangan field. While infrastructure projects will be the catalysts for the construction sector. We are projecting economic growth in 2015 to be around 5.3% (2014e: 6.0%) with inflation rate expected to average 4.8% (2014e: 3.3%). On OPR, we assigned 50:50 chances that another hike of 25 basis points from the current level of 3.25% might happen as capital outflows would be the main consideration in view of the expected increase in the US Federal Reserve Fund Rate (FFR) sometime in 2015. For Internal Circulation Page 5
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