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The Global Economic Landscape

The global economy has been thrown into a state of uncertainty caused by the trade war between the United States and other nations, especially the People’s Republic of China. The International Monetary Fund (IMF) has revised downwards the global economic growth forecast for the year 2019 from 3.9% in July 2018 to 3.2% in July 2019. The World Trade Organisation (WTO) has also reduced the forecast for world merchandise trade growth for 2019 from 2.6% in April 2019 to 1.2% in October 2019, the lowest since 2009. The government projects the economy to grow by 4.8%yoy in 2020 despite external headwinds for the Malaysian economy such as USA-China trade war, USA presidential elections, protectionist EU, geopolitical tensions in Middle East and volatility of commodity prices.

Economic Situation Back Home

As a trading nation, Malaysia cannot avoid being affected by these external headwinds as exports shrank marginally for the first 8 months of 2019 from a year ago. Malaysian exports are still expected to record positive growth for 2019. During the same period, Malaysia recorded RM92.5 billion worth of trade surplus, which is larger in the same period in 2018. This healthy trade balance will keep the country’s current account in surplus for the year. Overall, Malaysia’s balance of payments continues to be positive, with the current account surplus for 2019 is expected at RM43.4 billion. Meanwhile, as at 30 September 2019 our international reserves remain healthy at RM431.3 billion or USD103 billion. In the first half of 2019, GDP growth sustained for 1st and 2nd quarter. Indeed, Malaysia is one of the few economies in the world that experienced faster growth in the second quarter compared to the previous quarter despite the global trade war. The Malaysian financial system also remains sound and stable, despite a challenging global environment and high degree of volatility in the international financial markets throughout the year.

Budget 2020: Continuation of Expansionary Policy

On 11th October 2020, a day anticipated by many Malaysians as Malaysia’s Finance Minister Y.B. Lim Guan Eng tabled the second budget by the Pakatan Harapan government focuses on its “Shared Prosperity Vision 2030” theme. Previously, the first Pakatan Harapan Budget tabled in 2018 focused on fiscal consolidation and rationalisation, institutional reforms and people-centric policies to right the many wrongs of the previous administration. The Budget 2020 emphasises on sustainable economic growth, revenue enhancement and prudent spending despite its tight finances, saddled by heavy government debt that accounts for ~53% of the country’s GDP. Notably, 2020 net development expenditure is expected to increase by 4.6% to RM55.2bn, while key operating expenses such as emoluments (+0.7%) and retirement charges (+1.9%) are projected to register the lowest incremental growth in recent years, compared to core 2020 revenue growth of 4.8%. Unsurprisingly, the 2020 budget deficit will drop to 3.2% in 2020 (vs. 3.4% in 2019), compared to its initial target of 3.0%. The prospect of achieving a balanced budget over the next 3 years is indeed tough particularly with the environment of global economic and market uncertainties.

Figure 1: Budget Deficit to GDP Ratio (%)

In this article, we will discuss 5 major sectors and businesses with significant impacts arising from Budget 2020 strategies.

Banking Sector

Figure 2: The banking sector will play a key role in affordable housing and SME financing

Rent-To-Own (RTO) Homes Scheme

Government will work with financial institutions to introduce a Rent-To-Own (RTO) Homes Scheme. This is to assist potential homeowners that face difficulties in obtaining the 10% deposit and find it difficult to access home purchase financing. For first home purchase of up to RM500,000.00. Applicant will rent for a period of up to 5 years and after one year, will be given the option to purchase the home at the price fixed upon the lease agreement being signed. Residential mortgages continue to be the highest contributor for the banking system’s total loans book, 31.9% or RM555.5 billion as at end August 2019. This is despite certain segments finding difficulties in obtaining home financing. While RTO scheme could assist in addressing the issue, it could also provide the banks with potential additional risk as the banks could be saddled with unutilized properties. Nevertheless, the additional risk to banks’ asset quality will not be significant as it will be covered by the value of the properties. Maybank is the first bank to offer RTO scheme.

One-off digital incentives

One-off digital incentives worth RM30 to all Malaysians over 18 years of age with annual income of less than RM100,000.00 which will be implemented by Khazanah Nasional Bhd. RM450 million allocated to this could potentially  benefit existing major e-wallet provider such as TouchNGo, Boost and GrabPay. CIMB Bank has included TouchNGo in its Forward23 plan.

Boosting the Economy’s Backbone – Small and Medium Enterprises (SMEs)

Customized investment incentive packages to attract Fortune 500 companies and “Global Unicorns” to generate additional economic activity and Small and Medium Enterprises (SMEs). SME financing have been a key focus for the majority of banks recently. Furthermore, with better Government support and potentially better business environment, SMEs will be more confident to expand and borrow. Banks with a strong niche in the SME financing segment such as Alliance Bank could benefit. In addition to that a 50% matching grant up to RM5,000 for SMEs need to adopt digitization measures, including Electronic Sales System (e-POS), Enterprise Resource Planning (ERP) and Electronic Salary Payment System. Alliance Bank has its Alliance@Work program which offers Electronic Salary Payment System to its SME clients, and RHB Bank provides ERP type solutions.

Consumer Sector

Figure 3: Minimum wage to increase to RM1,200 nationwide starting Jan 1, 2020 will have a minimal impact on total staff cost for large consumer players as most staffs are paid above this level.

Bantuan Sara Hidup (BSH) scheme

Bantuan Sara Hidup (BSH) scheme will be continued and expanded to cover: a) Single individuals aged above 40 years old who are earning less than RM2,000 per month, b) all disabled persons aged 18 years old and above, with an income less than RM2,000 per month which entitled these recipients to payment of RM300 and automatic qualification as a recipient of the free MySalam Takaful scheme. The amount allocated for BSH is the same as last year. However, the increase in scope of eligible recipient for BSH coupled with the initiatives to increase the income of farmers will further increase disposable income of the B40 category. Spending on F&B related products to be stable and hence, this benefits company that have sizeable market share and diverse product range that caters to all income categories such as Nestlé (Malaysia) Berhad, Dutchlady Berhad and F&N Holdings Berhad.

Malaysians@Work initiative

The Malaysians@Work initiative aimed at simultaneously creating better employment opportunities for youth and women and reducing our overdependence on low-skilled foreign workers. With better employment opportunities, youth and women will contribute positively to food and beverage (F&B) spending given that they have a higher average monthly expenditure on F&B products away from home. In addition, Malaysian spends around 34.0% of total spending on food. This is in line with the growing number of restaurants, fast food joints and hawker stalls which made many young adults and women are switching preferences from home cooked meals to buy food from outside. This will also benefit convenience store operators like Family Mart which is operated by QL Resources Berhad, 7-Eleven Malaysia Holdings Berhad and MyNews Holding Berhad.

Property Sector

Figure 4: Financing of up to RM10b to be provided by financial institutions with the support from Government via a 30% or RM3b guarantee.

Lower foreign ownership threshold for high rise properties in urban areas

In order to reduce the overhang of high-rise units amounting to RM8.3b in 2Q19, foreigners are able to purchase houses priced at RM600,000 and above from RM1 million previously. This will be positive for developers with high exposure in high-rise buildings and high inventories previously as now they are able to market their products to foreigners. While the lower threshold for foreign home owners may help in clearing some of the unsold high-rise units, developers will have to compete with regional developers in attracting property investment in Malaysia. Property developer like UOA Development Berhad adopted the strategy of launching urban-based properties in strategic location within the Klang Valley, which should be well-received by property buyers.

Shift in Real Property Gain Tax (RPGT) Base Year

Another thing to note is the enhancement of Real Property Gain Tax (RPGT) treatment from the base year of 1st January 2000 to 1st January 2013. Revising the base year will allow sellers to pay lower RPGT. Continuous improvements to the RPGT policy can be considered to boost more interest and activities in the secondary property market, as many buyers are looking to upgrade after disposing of their older units.

REITs Sector

Figure 5: Higher than expected tourist arrivals and spending may have a positive impact on REITs with exposure to the retail and hotel segments.

Promote Visit Malaysia Year 2020

The Government has allocated RM1.1 billion to promote tourism in Malaysia, including attracting international visitors to the country. This includes improving the tourism infrastructure as well as to promote arts, cultural and heritage activities. The arrival of approximately 30 million tourists is expected. Malls and hotels in tourist hot spots may benefit from the increase in tourist arrivals and spending popular in shopping malls. However, neighbourhood malls may not be direct beneficiaries from the increase in tourist arrival due to location and offering. Income tax exemption for organisers of approved arts and cultural activities, international sports recreational competitions and conferences may also spur more activities and take up of hotel spaces and rental of convention halls.

The measures announced in Budget 2020 will have minimal impact on REITs as most of their tenancy agreements are mid-to-long term. That said, higher than expected tourist arrivals and spending may have a positive impact on REITs with exposure to the retail and hotel segments. These REITs are like IGB REIT and Sunway REIT due to its key assets that are located in an integrated and mature township as well as the resilient rental income from its respective mall.

Telecommunication Sector

Figure 6: The NFCP initiative will greatly improve the availability and speed of broadband and broadband-related services.

National Fiberisation & Connectivity Plan (NFCP)

The Government will create the necessary infrastructure to construct a Digital Malaysia by implementing the National Fiberisation & Connectivity Plan (NFCP) over the next 5 years which will provide comprehensive coverage of high speed and quality digital connectivity nationwide including rural areas. The NFCP will adopt a public private partnership approach. The implementation of NFCP will impact companies engaging in the provision of telecommunication-network services. This includes Sacofa Sdn Bhd (a 50% -owned subsidiary of Cahya Mata Sarawak Bhd, Opcom Holdings Bhd and OCK Group Bhd. In conjunction with this, Telekom Malaysia Bhd is pitching to be Malaysia’s exclusive 5G network provider. At this juncture, TM has more than 540k km in deployed fibre and core capacity.

Budget 2020 – A Visionary Budget

A vision of Shared Prosperity continues the tradition of Vision 2020, infused with ideas, idealism, innovation, institutional reforms and integrity to forge a new Malaysia. Budget 2020 is viewed as expansionary in nature enhancing Malaysia’s competitiveness and well-being of its people, aiming at facilitating the economy, enhancing the nation’s competitiveness through sound fiscal and monetary policies on top of ensuring better and efficient income distribution to cater for specific target groups. The budget would assist in stimulating the domestic economy with various measures introduced. Despite being exposed to external risks such as trade tensions, financial market volatility and geopolitical risks, the government is optimistic that the economic growth momentum will remain buoyant despite at moderate pace.

The Four Thrusts and 15 Strategies of Budget 2020 towards “Shared Prosperity Vision 2030”

1. Driving Economic Growth in the New Economy and Digital Era

Strategy 1: Making Malaysia the Preferred Destination for Investment
Strategy 2: Accelerating the Digital Economy
Strategy 3: Strengthening Access to Financing for Businesses
Strategy 4: Strengthening Economic Diversity

2. Investing in Malaysians: Levelling Up Human Capital

Strategy 5: Enhancing job opportunities for Malaysians
Strategy 6: Modernising the Labour Market
Strategy 7: Investing in Education and Talent

3. Creating a United, Inclusive and Equitable Society

Strategy 8: Inclusive Development – RM10.9 billion Allocated for rural development
Strategy 9: Towards Better Health Services
Strategy 10: Enhancing the Transportation Ecosystem
Strategy 11: Promoting Access to Housing
Strategy 12: Unity through Sports
Strategy 13: Promoting Environmental Sustainability

4. Revitalisation of Public Institutions and Finances

Strategy 14: Commitment to Fiscal Consolidation
Strategy 15: Strengthening Institutions, Governance & Integrity

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Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.

This article was written by Team VIC
Team VIC is formed by experienced and well-trained individuals from Value Investing College (VIC). The team has been consistently studying the latest stocks market trend in order to focus on educating the layman on investment principles and techniques.

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