Budget 2019 to retain investor, consumer confidence
As we have postulated prior to the 14th General Election, if Pakatan Harapan wins the election it would create an unprecedented major policy disruption in the short to medium term. Kenanga Research
KUCHING: As the announcement on Budget 2019 draws nearer, analysts have projected that the main focus of the budget will be on regaining investor and consumer confidence while striking a balance between the need to consolidate.
According to the research arm of Kenanga Investment Bank Bhd’s (Kenanga Research), apart from fulfilling promises and proving it can do the job well, the budget’s main focus would be regaining investor and consumer confidence while striking a balance between the need to consolidate and, if need be, raise development spending to ensure the economy becomes more resilient to face growing instability in the global economy.
“As we have postulated prior to the 14th General Election (GE14), if Pakatan Harapan wins the election it would create an unprecedented major policy disruption in the short to medium term,” Kenanga Research said in a special report.
“The new government did not waste time to replace the Goods and Services Tax (GST) with the Sales and Service Tax (SST) as well as review key development projects, cut wastage on operating expenditure and reintroduce fuel subsidy.
“Inadvertently, these actions raise the risk on the ability of the Government to manage its debt and reduce its budget deficit. Moreover, this would limit its fiscal policy option and resources to support the economy despite higher oil revenue.”
As such, Kenanga Research expected the 2019 Federal Budget to be less expansionary in view that the fiscal prudence and the fiscal deficit is expected to exceed three per cent of gross domestic product (GDP) for this year and possibly the next.
“We expect the coming budget to remain slightly expansionary as it would be unwise for the government to fully stick to fiscal discipline and set an ambitious target to reduce the fiscal deficit in view of rising global uncertainty and slowdown next year,” it read in the research arm’s Budget 2019 preview.
“With steadier crude oil revenue stream, and the potential capital gain from the proposed asset monetisation exercise, there is room for the budget to be slightly expansionary while committing to fiscal prudence.”
Kenanga Research’s preview further explained that given the difficulty to commit to fiscal consolidation and the limitation to spend more due to budget constraints, the government is expected, at best, to only achieve incremental reduction of its fiscal deficit or just 0.1 percentage point to three per cent of GDP in 2019 from an estimated 3.1 per cent of GDP in 2018.
This was premised on the expectation that GDP growth would meet the research arm’s projection of 4.7 per cent or better.
“On the upside, we do not discount that the new administration would put in more effort to clean up the public finance machinery and improve governance as we have observed since it took over the administration in May.”
Meanwhile, Kenanga Research also highlighted that the prospect of a slowing economy this year and the next would mean potentially less revenue for the Government.
“The abolishment of the GST doesn’t help. In fact, it would leave a big hole in the Government coffers that its replacement, the SST, wouldn’t be able to fully plug it. While this would mean no increase in corporate and individual income tax, the Government has given some thoughts on broader tax reforms namely introducing inheritance tax, capital gain tax, or even new taxes on soda and on e-commerce.
“Nonetheless, it would be more effective to deal with wastage and trim unproductive expenditure than to introduce new taxes which are usually unpopular and likely to raise cost of doing business.”
Additionally, Kenanga Research expected the new Government to announce measures to promote investments and innovation in the upcoming budget, to further prepare the economy for the uncertainty and challenges on the global front.
“This would mainly involve promoting and incentivise small and medium enterprises (SMEs) to embrace computerisation of manufacturing under Industry 4.0. This would ease its entry into the global value chain to adapt and compete with global players.”
It noted that other focus areas to promote investments would be in transportation, automotive, e-commerce, renewable energy and tourism which has also been outlined in the Mid-Term Reveiew of the 11th Malaysia Plan.