BUDGET 2017 COMMENT Franklin Templeton Investments Fixed Income & Sukuk Executive Director/Head Malaysia Hanifah Hashim
On the overall, Malaysia’s Budget 2017 was tabled amid delicate domestic and external environments. The Budget 2017 aims to strengthen the country’s fiscal position through prudent spending while supporting economic growth, and at the same time paying close attention to the well-being of the rakyat. It is a fine balance to strike, but if it is well executed it can provide grease to the economic engine to generate economic activities and boost business confidence, which in turn create domestic demand that fuels economic growth. This can be a challenging task especially against a global economic backdrop that is driven by uncertainty in the European and US political landscapes, the risk-off mode that reverberated the market this week due to the comment by the US Fed Chairman Janet Yellen of a possible rate hike, and the ongoing moderation of growth in China.
Fiscal deficit target – Looking back at the first half of 2016, the dampened business sentiment, heightened risk aversion by the market after the Brexit referendum in June 2016, lower oil prices resulting in lower-than-expected revenue, and softer domestic demand have led the market to forecast that the government may miss its 2016 fiscal deficit target of 3.1% of gross GDP by 0.1 percentage points. That said, the country has come a long way in a relatively short time span considering the government budget fiscal deficit once stood at a record low of 6.7% of GDP, which was recorded in 2009 during the global financial crisis. We believe the actual 2016 fiscal deficit figure will come in at around low 3.0% region and we think that is still an acceptable rate to international rating agencies given the challenging global economic climate.
Diversified economy – The country’s fiscal position in 2H16 and into 2017 is also expected to improve as the government has been exploring other revenue-generating measures to support its balance sheet such as the diversification of Malaysia’s economy by reducing reliance on oil-related income streams, increasing the value of electronic export goods and building a strong service sector where Malaysia’s young and productive population represents a big consumer market in a predominantly consumption-driven country (representing 60% of GDP). These are signs of a path paved towards a developed economy and in our view, Malaysia remains a competitive economy among its emerging market peers.
Balance sheet – The country’s trade surplus remains healthy, foreign reserve that could support 8.5 months of retained imports, and GDP growth for the full year 2016 could come in at 4.0%, which would be commendable given a slower global growth.
Local bond market – We expect continued volatility as the world awaits the results of the next major macroeconomic event, the US Presidential Election, which will be concluded by Nov 8, 2016, as well as the subsequent Federal Open Market Committee (FOMC) meeting in December 2016, where the probability of a Fed rate hike has increased to 60%. The other investment themes we have seen such as movement in oil prices, China’s growth outlook and its related corporate risks, as well as other geo-political risks (such as the upcoming Italy referendum in December 2016 on reforms to the country’s constitution) will likely continue to drive the markets going forward. Given these issues, that should keep yields low for the domestic bond markets, although global headlines may cause sporadic volatilities in the market. With weaker domestic demand, weak export data and low inflation, we expect Malaysia’s growth to slow down further and monetary policies to continue to be accommodative going into 2017, with the potential of another OPR cut may occur.
Targeted fiscal spending – Infrastructure development projects is one of the key fiscal spending that we believe can benefit the economy and the rakyat if it is targeted and transparently distributed due to its resultant multiplier effect on other sectors such as construction, manufacturing and services. Fund raising will also boost the bond and Sukuk market supply, which provides a good hunting ground for investment managers with local portfolios, like Franklin Templeton, to invest in.
In short, Malaysia continues to show fiscal discipline, having progressively narrowed its fiscal deficit since the global financial crisis to-date, putting in painful measures such as introducing the 6% Government Service Tax, reducing fuel subsidies and diversifying its economy.