Malaysia Budget 2018:Delivering the best of both worlds
Prime Minister Najib tabled a 2018 budget that delivered the best of both worlds:fiscal consolidation alongside pro-consumer measures that should help sustainprivate consumption, in line with what we have seen in past election year budgets(elections must be held by August 2018). This juxtaposition was in line with ourexpectations (see Best of both worlds: Malaysia 2018 Budget of 20 October 2017)and was possible thanks to strong growth and revenue assumptions for next year –particularly for corporate tax and non-tax revenues such as investment returns.
The government pencilled in a deceleration in development expenditure growth fornext year (1.1%), allowing for more substantial increases in current expenditure(6.6%). On the surface, this is cause for concern. After all, it points to a decline in thetype of productive infrastructure spending that fuels future growth. But in reality, thegovernment has adeptly increased sources of off-budget financing thanks to therobust pipeline of Chinese-funded infrastructure projects alongside some domesticand other foreign private financing. As a result, Malaysia is likely to see relativelystrong investment over the coming two years, which should result in a moderate dragon the current account (see ASEAN Perspectives: Sizing up the ‘OBOR’ impact of26 May 2017).
Sustained fiscal consolidation in 2018 should be a welcomed development for foreigninvestors, in our view. But we remain some ways away from the government’s goal todeliver a near-balanced budget by 2020. Earlier this year, Second Finance MinisterJohari stated that this could be delayed but that the government ostensibly remainscommitted to this goal. In any case, this is a development that will need to bemonitored in the coming two years alongside the government’s possibleaccumulation of contingent liabilities due to foreign-funded but domestically ownedinfrastructure projects.
Rates Strategy: We remain bullish on Malaysia government bonds with no negativesurprises unveiled during the 2018 Budget Speech. The government stuck to its fiscalconsolidation pledge, lowering the fiscal deficit from 3% of GDP in 2017 to 2.8% ofGDP in 2018. Interestingly, bond supply numbers for 2018 are identical to those of2017. Net government bond issuance will remain at MYR40bn as the absolute size ofthe fiscal deficit has been kept unchanged at MYR40bn.