PETALING JAYA: Malaysia’s fiscal deficit could increase to 3.7%-4.6% of gross domestic product (GDP) under Budget 2019, which is the inaugural budget for the Pakatan Harapan-led government to be tabled in Parliament on Nov 2, according to AmBank Research.
Noting the spike to be a “one-off” scenario, the brokerage said the fiscal deficit is expected to increase next year from the expected 2.8% of GDP in 2018 due to a refund for the goods and services tax (GST) and income tax, and slower revenue growth for the government.
“In our view, the fiscal deficit-to-GDP is expected to jump in 2019, largely due to the RM35bil refund for the GST and income tax,” AmBank Research said in its report yesterday.
“With the GDP projected at 4.5%, resulting in a 3%–5% drop in revenue plus a 5%–10% cut in total expenditure, we expect the fiscal deficit-to-GDP to jump to between 3.7% and 4.9%,” the brokerage explained.
The brokerage noted that Budget 2019 would unlikely contain short-term populist measures such as providing subsidies, grants and easy government-led financing. Rather, it said, Budget 2019 should provide strong and clear policies that would help the country’s economy ride out the current challenges.
Meanwhile, for 2018, AmBank Research said it would not discount the risk of the government missing the fiscal deficit-to-GDP target of 2.8%.
“After seeing the Barisan Nasional government lowering the fiscal deficit-to-GDP from its peak of 6.7% in 2009 to 3.1% in 2017 and having projected it to drop to 2.8% in 2018, it now remains unclear if the 2018 fiscal deficit-to-GDP would be able to meet the target,” it said.
The brokerage noted that the Pakatan Harapan-led government was saddled with a huge public debt of RM1.09 trillion, or 80.4% of GDP, under the “balance sheet” and the need to refund a RM35bil GST and income tax, which would appear under the “income statement”, besides experiencing the shortfall of revenue by replacing the GST with the sales and service tax (SST).
“After taking into account the revenue loss, following the replacement of the GST with the SST, much depends on the expenditure cut. Assuming expenditure is slashed by 3%–5%, with the oil price at US$66 to US$71 per barrel, we project the 2018 fiscal deficit-to-GDP to be around 2.8% to 3.3%,” it explained.
AmBank Research said the country’s fiscal deficit-to-GDP would likely ease to between 2.9% and 3.1% by 2020 on the back of a better GDP growth of 5.1%, supported by prudent management, greater levels of transparency and governance.
The brokerage has projected that Malaysia’s GDP growth would slow to 5% this year from 5.9% in 2017 on the back of lower public expenditure, weak mining and agriculture, and slower construction and infrastructure activities, following the postponement of some of the mega-projects.
AmBank Research has maintained its outlook that Bank Negara would keep the overnight policy rate (OPR) unchanged at 3.25% until the first half of 2019.
The brokerage has lowered its end-2018 FBM KLCI target to 1,790 from 1,900 points previously, and its end-2019 target to 1,890 from 2,020 points previously based on an 18.5 times earnings multiple.
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