20 September 2019

A likely expansionary Budget 2020, mainly from higher DE

Economic Update
Budget 2020 likely to include measures to sustain private consumption
The 2020 Malaysian Budget will be presented on 11 October 2019, with the
theme “Shared Prosperity: Sustainable and Inclusive Growth Towards High Malaysia-
Income Economy.” The upcoming 2020 Budget is crucial as it will be the final
budget under the Eleven Malaysia Plan (11MP) for the 2016-2020 period.
Similarly, the strategies on the Budget proposals should be seen in the context
Budget 2020
of ensuring a transition to the development plan of the Twelve Malaysia Plan
(12MP) for the 2021-2025 period, as well as setting out the directions and right
Preview
strategies for Malaysia to become a high-income economy.

Despite widely expected to be an expansionary budget to stimulate domestic

demand amid the global economic uncertainty in 2020, we believe the Federal
Government will remain focused on fiscal discipline, incurring a slightly lower
budget deficit of 3.2% of GDP in 2020, compared with a deficit of 3.4% of GDP
in 2019E, slightly higher than the initial official target of 3.0% of GDP (see Fig 1).

The increase in the budgetary allocation for operating expenditure will be

gradual, but allocation for development expenditure (DE) will likely be increased
in Budget 2020. Based on our estimate, we believe the Government’s operating
expenditure will be slightly higher by 2.6% to RM235.9bn in 2020 (RM222.9bn
in 2019E). We believe development expenditure plays an important role to
sustain the country’s economic growth, where the expansionary impact will help
to preserve the Government's revenue source (i.e., direct taxation) generated
by economic activities.

Fig 1: Federal Government Finance (Affin Hwang’s own estimates)

RM billion
2017 2018 2019E 2019E* 2020F
Total revenue 220.4 232.9 261.8 231.8 238.8
Operating expenditure 217.7 231.0 259.9 230.0 235.9
Current balance 2.7 1.9 2.0 2.0 2.8
Gross development expenditure 44.9 56.1 54.7 54.7 55.7
Less: Loan recoveries 1.9 0.8 0.7 0.7 0.7
Net development expenditure 43.0 55.3 54.0 54.0 55.0
Overall balance -40.3 -53.4 -52.1 -52.1 -52.2
% of GDP -3.0 -3.7 -3.4 -3.4 -3.2
E: Budget 2019 estimate
E*: Adjusted for one-off tax refunds
F: Affin Hwang's forecast

Our estimate forecasts development expenditure to be higher at RM55.7bn in

2020 as compared to RM54.7bn in 2019E. This move is intentional as
development expenditure on construction-related projects generally has a
higher multiplier impact on the economy relative to operating expenditure, see
Fig 2.

Fig 2: Output Multiplier by Sector

2010 2015
Agriculture, Fishing & Forestry 1.52 1.35
Mining & Quarrying 1.20 1.29
Manufacturing 1.79 1.95
Utilities 1.56 1.69
Construction 1.90 2.03
Wholesale & Retail Trade 1.54 1.58
Accommodation and Food & Bevrages 1.85 1.85
Transportation & Storage and Information & Communication 1.93 1.85
Finance & Insurance 1.83 1.49 Alan Tan
Real estate & Ownership of Dwellings 1.58 1.40 Research Team
Business & Private Services 1.60 1.71 (603) 2146 7540
Government Services 1.51 1.69 alan.tan@affinhwang.com
Source: DOSM

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com

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20 September 2019

We expect the Government revenue to still outpace that of operating

expenditure to register a substantial operating surplus of RM2.8bn in 2020
(RM2.0bn in 2019E), remaining in surplus for 33 years in a row since 1987.
Similarly, based on historical trends, it is evident that allocation of development
expenditure will be higher in the last year of the five-year plan. The Government
had proposed and revised development expenditure under the mid-term review
of the Eleven Malaysia Plan (11MP) to RM220bn. Based on our estimate,
development expenditure is expected to be substantial at around RM55.7bn in
2020, as compared to RM54.7bn estimated for 2019. In the first four years
(2016-2019) of the 11MP, the Federal Government has disbursed about 89.9%
or RM198bn of the total RM220bn.

Fig 3: Development expenditure under the 5-year Malaysia Plans

RMbn
(% yoy) First four years average Final year
70 55.7
52.8
60 (6.6%) 49.4 (1.8%)
42.2 43.8 (8.1%)
40.8
50 (12.9%) (-6.9%)
34.9 (3.2%)
40 (2.7%) 30.5
27.9
(5.8%)
(23.6%)
30 17.8
(12.9%)
20
10
0
1996-2000 2001-2005 2006-2010 2011-2015 2016-2020F
7MP 8MP 9MP 10MP 11MP
Source: MOF

2020 budget may be based on oil assumption of US$70 per barrel

We believe the crude oil price assumption in preparing and tabling for the
Malaysia’s Budget 2020 has been revised higher from an initial figure of US$60-
65 per barrel to US$70 per barrel, following the Saudi Arabia oil attacks.

Fig 4: Higher crude oil price assumption

75.00

70.00

65.00

60.00

55.00

50.00
12-Mar-19
26-Mar-19
9-Apr-19
1-Jan-19

12-Feb-19
26-Feb-19

4-Jun-19

16-Jul-19
30-Jul-19
23-Apr-19
7-May-19

13-Aug-19
27-Aug-19
10-Sep-19
15-Jan-19
29-Jan-19

21-May-19

18-Jun-19
2-Jul-19

Source: Bloomberg

Saudi Arabia oil attacks a turning point leading to higher global oil prices
The drone attack over the past weekend on Saudi Arabia's Abqaiq refinery and
oil processing facility and Khurais oil field has impacted production by around
5.7mmbpd, lowering current production from 9.8mmbpd to 4.1mmbpd, as
reported. This represents a significant 58% of its own production and 19% of
OPEC’s total production as of August 2019, which made up 5% of world supply.
Since the attack on 15 September 2019, the price of Brent crude oil has risen
sharply by around 15% from US$60 per barrel to US$68 per barrel currently.

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com

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20 September 2019

While Saudi Arabia had initially guided for full production resumption early this
week, Saudi turned less optimistic about a full recovery and currently only
expects to restore one-third of the lost production in the near term. It is uncertain
at this juncture how long the global outrage will last.

However, we believe the US strategic petroleum reserve may be used to

mitigate the shortfall. President Trump has earlier guided that it will tap into US
oil reserves to ensure that there is no sharp increase in global oil prices. Higher
oil prices will likely be bad for the US economy, especially prior to his upcoming
presidential election. We currently maintain our 2H19 Brent oil price assumption
at US$65-70/bbl, but there could be upward bias to our current assumption in
the short term depending on the timeline of production resumption. Our view
reflects the current uncertainty on global crude oil supplies.

Federal Government’s revenue to benefit from oil price gain

From a macro perspective, based on an earlier estimate, for every US$10 per
barrel increase in the price of global crude oil, the Federal Government’s
revenue will likely translate into a gain of about RM3.0bn a year. While the
expected additional revenue can help cover for the Government’s subsidy bill
from rising domestic petrol prices, we believe the upcoming proposed
implementation of the targeted fuel subsidy scheme will also lower the subsidy
amount allocated by the Government for petrol (RON95) and diesel. There will
be some windfall from subsidy savings to provide for possible contingency
measures (such as additional allocation for development expenditure or cash
assistance through BSH), to cushion the negative impact from the global trade
war tensions.

Lower subsidy bill from the upcoming targeted fuel subsidy scheme
As guided, with the proposed targeted fuel subsidy scheme, the price cap on
RON95 petrol (currently at RM2.08 per litre) may soon be gradually removed.
Based on an earlier calculation from last year’s Budget, the targeted subsidy is
expected to cost the Government only RM2bn for 2019, with the oil price
assumption of US$70 per barrel. While the Government may still be subsidizing
RM0.30 sen for every litre of RON95 petrol as well as every litre of diesel, the
authority will likely provide a timeframe for phasing out the current system and
introduce a targeted fuel subsidy scheme for 2020, which may include proposals
such as cash assistance directly given to lower-income households.

As such, we believe the increase in the price of global oil will improve Malaysia’s
revenue from the contribution of oil-related revenue including PITA, Petronas
dividends, petroleum royalties and other oil-related income (such as export
duties on petroleum/crude oil and income from exploration of O&G), which is
expected to support Malaysia’s fiscal position.

Fig 5: Contribution of BR1M/BSH supportive of private consumption

Private consumption (% GDP) BR1M Disbursement (RM'bn)
56.0% 7
54.0% 6.3 6.1 6
52.0% 5.4 5.4
5
50.0%
4
48.0% 3.7
2.9 3
46.0%
2.1 2
44.0%
42.0% 1
40.0% 0
2010
2005

2006

2007

2008

2009

2011

2012

2013

2014

2015

2016

2017

2018

Source: Various sources

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com

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20 September 2019

Government to continue with measures to support private consumption

To address the socio-economic conditions from a higher cost of living, we
believe the Budget 2020 to continue with its targeted incentives for households
under the B40 category. The Government has been assisting the B40 group
through cash assistance, such as Bantuan Sara Hidup (BSH), and this will likely
be continued in 2020 to support their well-being. Apart from BSH, the budget
allocation for the tourism sector will also be another focus in the budget for the
2020 Visit Malaysia Year campaign. In tandem with the event, Tourism Malaysia
is targeting 30 million tourist arrivals in 2020 and tourist receipts of RM100bn
(28.1 million tourists in 2019E and RM92.2bn in 2019E, respectively). We
believe the Government will likely provide additional allocation for the Visit
Malaysia 2020 Year campaign, possibly a higher allocation than 2019, to grants
for international marketing and promotional programmes.

Fig 6: Tourism arrival and tourist receipts

th person % yoy
Tourist Arrival Tourist Arrival Growth (RHS)
35,000 60
30,000 50
40
25,000
30
20,000 20
15,000 10
0
10,000
-10
5,000 -20
0 -30
2019F
2020F
2005
2001
2002
2003
2004

2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

Source: Tourism Malaysia

Cut in corporate income tax on hold to preserve revenue streams

The Finance Minister already guided that the 2020 Budget is not expected to
introduce new tax measures targeting the corporate sector and investment
community (which may be referring to capital gains tax on shares and
inheritance tax). Nevertheless, while we believe the positive upside surprise to
the Budget measures will be from an across-the-board 1%-point cut in taxes on
corporate income earned, the Government will likely leave its corporate tax rate
unchanged in 2020 to preserve revenue streams from direct taxation.

Corporate income tax accounts for 51.1% of direct tax and 38.2% of total
Government revenue. We believe any cut in the corporate tax rate will only be
implemented from 2021 onwards, after Government revenue starts to increase
more steadily. Recently, Indonesia has proposed a reduction in the corporate
income tax (CIT) rate to 20% in 2022, from 25% currently, starting in 2021.

Need measures to support economy from uncertain global economy

Going into 2020, the global economy still faces substantial downside risks
emanating from the global trade war. The International Monetary Fund (IMF), in
its latest issue of the World Economic Outlook (WEO), downgraded its growth
forecast on the world economy by 0.1 percentage point to 3.5% for 2020 (3.2%
in 2019).

The global manufacturing PMI remained in contraction for the fourth consecutive
month at 49.5 in August from 49.3 July. Global semiconductor sales contracted
for the seventh consecutive month in July by 15.5% yoy, albeit at a slower pace
compared to 16.8% in June. With recent weak external data, as reflected in the
global PMI, this may suggest that manufacturers will remain cautious on new
orders and international trade going forward.

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com

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20 September 2019

According to the IMF’s latest assessment of the impact of the trade war, based
on a simulation, the recently announced tariffs by the US and China will lead to
a 0.3 percentage point reduction in global GDP growth in 2020, where more than
half of the impact will be due to lower business confidence and negative financial
market sentiment. Assuming that further tariffs are implemented, this may lower
global growth by 0.8 percentage points in 2020, with the IMF’s global GDP
growth possibly falling below the 3% level next year.

Growth in Malaysia’s private investment is highly correlated with external

conditions, where slower growth is likely from some postponement and delay in
the actual implementation of investment in the manufacturing and services
sectors, due to the global slowdown. Nevertheless, we believe the country's
domestic demand, especially private consumption, will sustain its growth
momentum, possibly benefitting from Budget 2020 measures.

The Government is likely to project the country’s real GDP growth to average
around 4.5-5.0% for 2020, against our expectation of 4.5% (4.7% estimated for
2019). However, in the event that the external environment deteriorates sharply
and if there is a need to introduce additional fiscal stimulus, we believe the
Government will allow its fiscal deficit target to be flexible to shore up economic
growth, whereby the fiscal deficit may be slightly higher than the deficit target set
and revert to the fiscal consolidation path once the global economic environment
stabilises.

Fig 7: Real GDP growth and 2019/2020 forecast

2018 2019F 2020F 2018 2019 2020F 2018 2019F 2020F
%yoy % of GDP % contribution point to GDP growth
GDP by Expenditure Components
Total Consumption 7.1 6.5 5.7 69.4 70.6 71.4 4.8 4.5 4.0
Private consumption expenditure 8.0 7.3 6.5 57.0 58.4 59.5 4.4 4.2 3.8
Public consumption expenditure 3.3 2.6 2.0 12.5 12.2 11.9 0.4 0.3 0.2
Total Investment 1.4 -0.1 1.4 24.6 23.5 22.8 0.3 0.0 0.3
Private investment expenditure 4.3 2.8 3.5 17.3 17.0 16.8 0.7 0.5 0.6
Public investment expenditure -5.0 -7.0 -4.0 7.4 6.5 6.0 -0.4 -0.5 -0.3
Domestic Demand 5.5 4.7 4.6 94.1 94.1 94.2 5.2 4.4 4.4
Net exports 11.4 3.5 1.6 7.0 6.9 6.7 0.8 0.2 0.1
Exports 2.2 0.9 0.8 67.6 65.1 62.8 1.5 0.6 0.5
Imports 1.3 0.6 0.7 60.6 58.2 56.1 0.8 0.4 0.4
GDP (2015 real prices) 4.7 4.7 4.5 100.0 100.0 100.0 4.7 4.7 4.5
GDP By Kind of Economic Activity
Agriculture, Forestry and Fishing 0.1 4.0 2.0 7.3 7.3 7.1 0.0 0.3 0.1
Mining and Quarrying -2.6 0.5 0.4 7.6 7.3 7.0 -0.2 0.0 0.0
Manufacturing 5.0 4.3 4.2 22.4 22.3 22.2 1.1 1.0 0.9
Construction 4.2 2.0 4.0 4.9 4.7 4.7 0.2 0.1 0.2
Services 6.8 5.9 5.6 56.7 57.3 57.9 3.8 3.3 3.2
GDP (2015 real prices) 4.7 4.7 4.5 100.0 100.0 100.0 4.7 4.7 4.5
Source: Affin Hwang’s forecast

Likely sectoral budget strategies and measures

On a sectoral basis, for the construction sector, we expect the Government to
likely revive some of the large-scale infrastructure projects (at reduced cost and
longer implementation timeline) such as the MRT3 and Pan Borneo Highway
Sabah (PBH) projects. We believe the MRT3 will enhance the public
transportation system in Klang Valley, while PBH will improve road connectivity
in Sabah and Sarawak.

According to our construction analyst, other projects such as the Penang

Transport Master Plan (PTMP) and HSR could be implemented based on a
public-private partnership concept. However, the decision on whether the HSR
will be revived is unlikely to be announced during the Budget 2020
announcement since the deadline agreed between the Malaysia and Singapore
governments is May 2020.

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com

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20 September 2019

Affordable housing will remain a key area of focus

We expect initiatives on affordable housing to continue in Budget 2020. This
will be in line with the recent measures by Bank Negara Malaysia (BNM),
where the eligibility criteria for its RM1bn Fund for Affordable Homes which
began in January 2019, was raised effective from 1 September 2019. The
maximum household income eligible is now RM4,360 from RM2,300, while
the maximum property price is now RM300,000 from RM150,000. The Fund
will be available for two years from 2 January 2019 or until the RM1bn fund
is fully utilised. Benefiting the construction sector, we expect the
Government’s development expenditure to emphasise building new hospitals,
water and sewerage systems, and rural roads to improve the lives of the people
in towns and rural areas under the Government’s concept of shared prosperity.

Fig 8: Potential large-scale infrastructure projects to kick off in 2019-2020

Project Cost (RMbn)
Penang Transport Master Plan (PTMP) 32
Bandar Malaysia infrastructure 21
Klang Valley MRT Line 3 - Circle Line (MRT3) 20
KL-Singapore High Speed Rail - Fast Train 20
Pan Borneo Highway Sabah (PBH) 13
East Coast Rail Link subcontracts 8
Sarawak Coastal Highway 5
Sarawak Second Trunk Road 6
Sarawak Water Grid Phase 1 8
Labuan Bridge 4
Johor BRT 3
Kota Kinabalu Water Supply Scheme 3
Total 142
Source: Affin Hwang

As for the property sector, we believe the Government will continue or expand
on incentives to assist first-time house buyers, as affordability remains an issue
for the B40 and low M40 groups, such as stamp-duty exemptions and mortgage
guarantees by Cagamas inclusive of down-payment support. There are some
reports noting that the minimum property price for foreigners to purchase local
residential properties (currently at least RM1m but some states impose a
minimum price of RM2m for landed properties) may possibly be reduced to help
clear the unsold units.

For the financial sector, potentially additional tax incentives may be given to
banks which adopt sustainable financing practices (i.e., green tech, renewable
energy) and fund new technology adoption initiated by start-ups (self-driving
cars, Prop Tech, Con Tech, Fintech).

As for the gaming sector (i.e., casinos), we believe that there will likely be no
increase in gaming taxes or licensing fees after the steep hike in Budget 2019,
as company profitability may still be negatively impacted by the hike. Post the
hike, Malaysia has one of the highest gaming taxation rates in Asia, which
significantly limits casinos’ ability to compete against regional peers for the VIP
and Premium-Mass clients. Both gaming volume and margin have are already
recorded a significant decline in 2019.

As for the consumer sector, on sin taxes, we believe that the risk of excise-duty
hikes on the brewers is less pronounced, with Malaysia’s existing taxation on
malt liquor already amongst the highest in the world. The last excise-duty
revision in March 2016 constituted a change in the excise-duty structure – from
RM7.40/litre plus 15% ad valorem tax, to a flat RM175 per 100% volume per
litre of alcohol – rather than a direct hike, and was then preceded by 10 years’
absence of duty hikes.

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com

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20 September 2019

Moreover, a sales tax of 10% and on-trade service tax of 6% had been already
imposed in 2018 following the abolishment of GST. In the event of a duty hike,
we expect the brewers’ volumes to be negatively impacted over the short term,
should they decide to pass on the cost to consumers – representing a fourth
round of price hikes since last year.

For the tobacco players, we do not foresee any excise-duty hikes to materialise
in Budget 2020. This is due to the unresolved illicit cigarettes trade situation
constituting 60% of the market since the Government’s aggressive spate of duty
hikes from 22sen/stick in 2013 to 40sen/stick in 2015, which has been further
exacerbated by the rise of cigarettes sold with fake tax stamps, alongside
unregulated vape products retailed at relatively more affordable prices than legal
cigarettes. We believe any possible revisions to the excise-duty structure would
be more likely to occur following the enactment of the MOH’s new Tobacco Act,
which is guided to be tabled in Parliament by March 2020 and encompass a
broader spectrum of regulations on the usage of tobacco, vape, e-cigarettes and
shisha.

For the auto sector, we see several potential initiatives for the sector in the
Budget 2020, such as 1) the possible higher allocation or study grants to further
strengthen the local workforce (via technical and vocational education training).
For instance, the new ‘national car’ definition in the upcoming National
Automotive Policy (NAP) 2019 requires the carmakers to use up to 98% local
workers in its workforce; 2) higher market development grant/allocation to spur
the rate of exports for component manufacturers; 3) possible allocation for the
establishment of charging stations, batteries production and management
systems for the upcoming ‘next-generation vehicle’, to prepare Malaysia on
becoming an energy-efficient carmaker; 4) incentives may be provided in the
form of tax breaks/exemptions for carmakers that are keen to expand research
and development and higher localisation efforts in Malaysia; and 6) special
incentives for first-time national car buyers that may help with affordability among
young adults.

As for the healthcare sector, we believe the Government will likely continue with
a higher allocation for healthcare, given the Government’s growing emphasis on
providing quality healthcare and social welfare protection as well as increasing
accessibility to health services. In addition, we believe that the Government
might potentially reintroduce the reinvestment allowance for pharmaceutical
manufacturers in Budget 2020, which was not renewed in Budget 2019.

As for the insurance sector, we expect continuous tax relief for annual EPF and
insurance/Takaful contributions, as well as possible tax incentives for insurance
firms, which subsidize insurance coverage for the B40 group / single mothers.

As for the plantation sector, we believe that there could be potential allocation
by the Government in the Budget for FELDA developments, as well as potential
allocation by the Government for development and replanting of palm-oil/
marketing programmes to assist smallholders.

For the telco sector, we expect the Government to highlight the recently
launched National Fiberisation and Connectivity Plan (NFCP). Spearheaded by
the Communications and Multimedia Ministry, the NFCP is a five-year plan
(2019-2023) with an investment cost of about RM21.6bn, to be funded by the
Universal Service Provider (USP) fund (RM10bn-11bn) and the private sector.
The NFCP is expected to create 20,000 job opportunities. Overall, we expect
the potential high investment expenditure to benefit the telco contractors and
equipment suppliers.

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com

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20 September 2019

Focus Charts
Chart 1: Malaysia GDP forecast Chart 2: Revenue and expenditure


Chart 3: Annual oil-related revenue vs Brent oil Chart 4: OE surplus

Chart 5: Malaysia budget deficit to GDP Chart 6: Companies and individuals income tax revenue

Source: All data for charts sourced from CEIC, DoS, BNM and Affin Hwang forecasts

Affin Hwang Investment Bank Bhd (14389-U) www.affinhwang.com

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20 September 2019

Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a
recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (“the Company”) based on sources believed to be
reliable and is not to be taken in substitution for the exercise of your judgment. Such sources have not been independently verified by the Company, and as such the Company does
not give any guarantee, representation or warranty (expressed or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or
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