The government is confident that the nation’s current account will remain in surplus in 2015.
In view of changes in the global economic landscape, Prime Minister Dato’ Seri Najib Razak yesterday announced a number of proactive measures to ensure Malaysia’s growth, development and deficit ambitions remain on track.
“We are confident of achieving GDP growth in the range of 4.5-5.5% this year with the implementation of the following strategies:- 1) ensure balanced, inclusive and sustainable economic growth; 2) continue fiscal reforms and consolidation; and 3) provide assistance to the rakyat and business community to rebuild infrastructure damaged by floods,” he said in a special address.
The government is also confident that the nation’s current account will remain in surplus in 2015, albeit smaller in the range of 2-3% of Gross National Income (GNI) [2014: estimated surplus at 5.1% of GNI].
Najib said the falling oil price necessitated a review of fiscal assumptions underpinning the 2015 Budget, with the revised forecast predicting a revenue shortfall of RM13.8 billion. Without any fiscal measures, the deficit would increase to 3.9% of GDP.
In light of falling oil prices, volatile capital flows and a worsening global economic outlook, the government revised its fiscal deficit target to 3.2% of GDP in 2015 – higher than the 3% set out in the Budget, but lower than the 3.5% in 2014, and in line with its continuing commitment to fiscal consolidation. Operating expenditure (opex) for 2015 is expected to be reduced by RM5.5 billion.
However, development expenditure would be fully maintained. This includes projects for the people economy such as public housing, flood mitigation, water supply, electricity and public transport infrastructure such as Pan-Borneo Highway. Projects such as the MRT Line 2, LRT 3, High-Speed Rail Kuala Lumpur-Singapore will be continued. The Prime Minister will in May table the Eleventh Malaysia Plan (11MP) to outline the development expenditure until 2020.
Najib stressed that the country is neither in a recession nor a crisis as experienced in 1997/1998, and 2009 which warranted stimulus packages. “The financial markets remain orderly and resilient. Although the ringgit has depreciated, it is expected to stabilise over time to reflect the strong economic fundamentals,” he said.
Barclays: Revised targets are achievable
The measures announced were largely within expectations, said Etiqa Insurance & Takaful’s head of research/ head of products & alternative investments, Chris Eng. Etiqa has an in-house expectation of 4.8% GDP growth for 2015 and a slightly higher deficit expectation of 3.5%.
Barclays believes the government’s revised targets are achievable, provided Malaysia’s growth does not slow significantly. The house forecasts GDP growth of 5.9% in 2014 and 4.5% in 2015 (recently lowered from 5.5% earlier). “Today’s budget is unlikely to have a significant impact on our growth forecasts, as we had already pencilled in some reduction in government and investment spending on account of falling oil prices. We also lowered our inflation forecasts to 2.6%, from 3.8% earlier,” Barclays said in its report.
CIMB Research is also keeping its 2015 GDP growth forecast of 5% for now but does not discount the possibility of downgrading that to 4.5% “mainly due to slower consumer spending in view of weaker pre-GST buying and dampened sentiment as well as cuts to the investment growth outlook”.
“It’s a relief is to see that the RM48.5 billion development expenditure was not cut. We await further details on where the RM5.5 billion cut in opex will come, and also details on the reduction in government revenue. I believe the market is expecting more details in the coming days,” said Etiqa’s Eng.
CIMB said the PM’s confirmation that directly-funded government-initiated projects under Budget 2015 will be implemented clears lingering concerns about possible delays and cancellations.
“This is positive for approved rail jobs, mainly the RM23-25 billion MRT 2 and RM9 billion LRT 3, both of which were scheduled for implementation in 2015. There was no mention of new highway projects but we gather that the implementation plans for these jobs would be privately-funded and should pick up pace as the year progresses. [Maintaining] the Pan-Borneo Highway was a positive surprise, as we had suspected that this project could be deferred,” it said.
CIMB believes the government will attempt to strike a delicate balance between managing the fiscal risk and the slower growth momentum. “Ultimately, key projects announced under the Economic Transformation Programme (ETP) and the 2015 budget should still continue given that there are growth targets to achieve in keeping with the country’s goal of becoming a developed nation by 2020. As such, we feel that there is no reason to hold back projects with strong national interest and which are privately financed.”
It added that the absence of electricity and gas price hikes in 2015 as well as encouraging government-linked companies (GLCs) and government-linked investment companies (GLICs) to invest domestically should also help cushion downside risks to investments and funds outflow.
Barclays sees the revised fiscal deficit as a positive surprise. “Given the sharp decline in oil prices, there is room for significant increase in the deficit – the PM said in his speech that without spending cuts, the deficit would have been 3.9% of GDP just from the drop in oil prices to US$55/bbl from US$100/bbl. As such, the government’s commitment to fiscal consolidation, despite a significant decline in commodities-linked revenues, surprised market expectations to the upside.”
Barclays also noted that the PM’s messages seem to suggest that the government is not overly concerned with the fall in the exchange rate as long as it does not cause major disruptions to financial intermediation.
“The ringgit is currently trading with a high correlation to oil prices, given the importance of energy exports (LNG specifically) to Malaysia’s trade balance. If oil prices continue to fall, we do not think that authorities will attempt to draw a line in the sand to halt the ringgit’s decline, but would continue to slow the decline through a combination of FX intervention and administrative measures,” Barclays said.