Malaysia may miss its budget deficit targets — HSBC

by **Cals** Tue 27 Oct 2015, 17:17

Malaysia may miss its budget deficit targets — HSBC

By Gho Chee Yuan / The Edge Financial Daily | October 27, 2015 : 9:37 AM MYT

This article first appeared in The Edge Financial Daily, on October 27, 2015.

[size=12][You must be registered and logged in to see this image.]In tabling Budget 2016 last Friday, Najib said the country’s revenue would rise 1.4% to RM225.7 billion in 2016 from a 0.8% rise this year. Photo by Suhaimi YusufKUALA LUMPUR: HSBC Global Research, which is of the view that Malaysia will likely overshoot its “highly conservative” revenue and expenditure projections in both 2015 and 2016, warns that the Malaysian government may miss its budget deficit targets for both 2015 (3.2%) and 2016 (3.1%).

It also said, in its note released on Saturday, that “potentially, overly optimistic projections on items such as goods and services tax collections and low operating expenditure leave the government little room for error”.

In tabling Budget 2016 last Friday, Prime Minister Datuk Seri Najib Razak said the country’s revenue would rise 1.4% to RM225.7 billion in 2016 from a mere 0.8% rise this year, while total expenditure would gain 1.7% to RM265.2 billion next year, with a 0.6% increase this year.

HSBC Global Research is of the view that Malaysia’s nominal gross domestic product (GDP) will pick up in 2016, and that public spending — particularly on the operational side — will be challenging to curb. Hence, it projects that Malaysia’s revenue growth could rise to 4.9% this year and 6.6% next year (from 3.4% in 2014), while expenditure could rise to 5% and 5.7% respectively (from 2.4% in 2014). “In net terms, however, our estimates still leave the overall budget deficit larger than what the government expects, at RM39.5 billion for 2015 and RM39.6 billion for 2016, or 3.4% and 3.2% of gross domestic product respectively,” the research firm said.

For now, the firm said the official 3.1% budget deficit target to GDP ratio is not great, but not terrible either — assuming the government does indeed manage to achieve a narrower gap of 3.2% this year as well. Meanwhile, it pointed out that despite the government’s highly conservative revenue and expenditure projections, the underlying macroeconomic assumptions for 2016 appear rather sanguine, with real GDP growth projected to decelerate only marginally, from 4.5% to 5.5% this year to 4% to 5% next year.

“While our growth projection of 4.6% for this year sits within the official forecast range, for 2016 we think real activity could slow to 3.6%,” it stressed.

It also said risks are that Malaysia’s shlowdown next year may turn out to be more significant than what the government assumes.

“The slowdown in private investment is expected to be a bit more material, at 6.7% versus 7.3% this year. Meanwhile, exports are predicted to bounce 0.9%, versus -0.8% in 2015, while imports are expected to accelerate to 1.5% from 0.8% this year,” it added.

HSBC Global Research concluded that in the very near term, the budget may well provide a fillip to Malaysian markets, with factors such as the Bantuan Rakyat 1Malaysia handouts, minimum wage hikes, and the list of sizeable investment projects potentially seen as providing weakening domestic demand a much-needed boost. “But we have our doubts about how long any upturn in sentiment can last,” it said, noting that the budget did not address the current high level of precaution among consumers, particularly with regard to the labour market outlook.

“Consequently, it is difficult to see the handouts and wage hikes suddenly translating into sustainably stronger private consumption. Higher minimum wages will also be an additional burden on firms, many of whom are already grappling with excess capacity amid a fall away in both external and domestic demand, as well as rising import costs [due to the ringgit’s weakness],” it pointed out.

“From the fiscal angle, this budget does not ‘rock the boat’ in any sense, and does just enough to keep the rating agencies at bay for now,” it added.
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