The largest national budget on record – can the economy get back on track?

By Hanifah Hashim, Chief Executive Officer/Head Malaysia Fixed Income & Sukuk, Franklin Templeton GSC Asset Management and Sukumar Rajah, Senior Managing Director, Director of Portfolio Management, Franklin Templeton Emerging Markets Equity,

Malaysia unveiled an expansionary budget for 2021 with a twin focus on easing the people’s burden and to get the economy back on track, on the back of the profound impact caused by Covid-19. Hence, the focus of the budget was distributing income to the broader segment of the population and protecting jobs.

The RM322.5 billion allocated is the largest national budget on record. Despite the challenges, the government is optimistic of  a strong rebound in 2021 with GDP growth forecast of 6.5% to 7.5% compared to an expected contraction of 4.5% in 2020, anchored by the anticipated improvement in domestic demand, global growth and international trade.

Here is a summary of our views regarding Malaysia’s Budget 2021:

• Fiscal Deficit Target

The budget deficit estimate of 6% for 2020 is understandable given the significant headroom that the government needs for a highly expansionary policy, in view of the dire state of the economy domestically and globally. That said, the target for a narrower fiscal deficit of 5.4% in 2021, which follows the path towards a lower average of 4.5% in 2021-2023, demonstrates commitment by the government to continue its track of fiscal consolidation and ensure Malaysia’s international rating do not deteriorate going forward.

• Local Bond Market

In our view, the bond market is going to be volatile with upward yields bias in 2021, with yield curves expected to rise slightly across the board in a steepening inclination. Based on the projected fiscal deficit target of 5.4% or RM84.8 billion, and government bonds maturity of RM73.7 billion in 2021, we projected total gross issuance to be around RM160 billion.

The supply of primary government bonds, government guaranteed bonds and corporate bonds are expected to be elevated as all segments are rushing to leverage the opportunity to raise funds in an attractive interest rate environment. Bank Negara Malaysia has put the monetary policy rate on hold in the last 2 policy meetings and with the expected strong recovery in 2021 and higher projected inflation, the rate will likely be maintained at the current level of 1.75% throughout most of 2021.

• Sectoral Views

On the bond market front, the low-interest rate environment will continue to entice new and existing issuers. In Budget 2021, the government has decided to proceed with existing transport infrastructure projects with an allocation of RM15 billion. We are expecting more construction companies to tap the bond market to seek funding, as well as some projects to be funded through government guaranteed issuance, in 2021.

Meanwhile, the property sector is given a slight boost via the full stamp duty exemption on transfer and loan agreement for first-time home buyers. Our view is that though this will provide a modest relief for the affordable home segment, it is insufficient to resolve the existing property overhang issue in the high-end segment. Property issuers in the bond market are mainly big property players and we believe bond investors will continue to underweight this sector.

On banking, the lack of automatic moratorium is positive for the sector as the targeted relief on loans is only given to low income borrowers which will have limited impact on the bottom line of banks.

The government also continues to encourage the issuance of SRI sukuk and bonds via income tax exemption for the next 5 years. We might see more primary corporate bonds issuance from the renewable energy space especially from the solar industry and we continue to be positive on this sector.

In the past few years, corporate issuers tapping the sukuk market has surpassed conventional issuers in a variety of sectors and we believe this trend will persist in the coming years. As at end September 2020, the outstanding corporate sukuk market comprised RM377 billion compared to RM146 billion in conventional bond.

• Impact on Equity market scene

Measures from the PRIHATIN and PENJANA stimulus initiatives are further refined and broadened to address the Covid-19 impact to the most vulnerable groups, with a focus on aiding disposable income, preserving employment and safeguarding business continuity.

There are constructive measures under the Budget’s second objective (Business Continuity) that focuses on improving productivity over the long term and transformation towards a high-income economy. Incentives such as the Industrialization Digitalization Transformation Scheme, valued at RM1 billion, is aimed at promoting and expediting digitalisation and automation activities.

We believe this will eventually drive an incremental positive effect on corporates in Malaysia over the long term. However, challenges such as further rise of Covid-19 cases, weaker than expected global economic recovery, lower for longer on oil prices and other geopolitical events may continue to weigh on the market direction in the near-term.

• Sectoral Views

Overall impact leans toward mildly positive with some favorable outcomes for key sectors such as healthcare, consumer and construction due to the absence of windfall tax on the gloves sector, higher cash assistance and bigger allocation for healthcare and development expenditure.

The technology sector will continue to benefit through special incentive packages for high value-added investments which will encourage R&D, foreign investment and the creation of a more vibrant ecosystem (competitive in supply/value chain).

Additionally, the consumer sector is expected to benefit from measures that may help spur consumption, coming from financial aid and social assistance through Bantuan Prihatin Rakyat (BPR)  and other measures such as lower statutory contributions and a targeted approach to personal income tax reduction. Meanwhile in the property sector, the affordable home segment is expected to pick up, benefitting from the stamp duty exemption for first home buyers on houses up to RM500,000.