Spotlight On Basic Fundamentals
Addressing the issues. The highlight of yesterday’s PEMANDU briefing was the Q&A session, which centered on the issue of Malaysia’s deteriorating macroeconomic balance i.e. narrowing current account surplus and persistent fiscal deficit. The Government reiterated its fiscal balance targets, the imminent imposition of the Goods and Services Tax, and the resumption of subsidy rationalisation and subsidy restructuring to a more “targeted approach”. A review on the pending mega-projects are also on the card, guided by the principle that any changes should not be at the expense of growth, and priority will be given to projects with high economic impact and low import-content.
We are comforted by the sound-bites from yesterday’s briefing. As highlighted in our strategy note yesterday, domestic fiscal reforms will reinstill confidence in Malaysian equities which have been sold down as foreign investors exit the region and emerging markets in general on US’ QE tapering fears. We have expected the fiscal reforms to be acted upon in the upcoming National Budget 2014 (to be tabled on 25 Oct), and possibly the Fiscal Policy Committee (FCP) meeting next Monday (2 Sep). The hint at yesterday's briefing is that (i) subsidy rationalization and (ii) the rescheduling of some major infrastructure projects, are the likely announcements by PM Najib next week.
Key takeaways and highlights
PEMANDU’s update yesterday on the Economic Transformation Programme (ETP) was presented by Dato’ Sri Idris Jala, Minister at Prime Minister Department and the CEO of PEMANDU:
As of 23 Aug 2013, there are 153 Entry Point Projects (EPPs) under the ETP (the number has grown from 131 at inception), with MYR218.3b investment commitments that are expected to raise MYR142.9b in GNI and create 434,268 jobs.
Of the MYR218.34b committed investments, MYR32.5b or 14.9% has been realised between 2011 and 1H 2013. For the period 2H 2013-2015, a total of MYR61.5b or 28.2% is targeted for realization.
Highlight of the day was the Q&A session, which was centered on the issue of macroeconomic balance. The Q&A session after the ETP Update briefing was hosted by Dato’ Sri Idris Jala and Tan Sri Dr. Mohd Irwan Serigar Abdullah, the Ministry of Finance’s Secretary General. Not surprisingly, the focus was on the Malaysia’s deteriorating macroeconomic balance i.e. narrowing current account surplus and persistent fiscal deficit, and the policy responses:
Government reiterated its fiscal balance targets, i.e. -4% of GDP this year (1H 2013: -4.1% of GDP), -3% of GDP by 2015 and at least a balanced budget by 2020, and it remained committed to capping the Government debt to GDP ratio at 55% (51.8% as of end-June 2013).
Goods and Services Tax (GST) is a must and not an option, with the possibility of it being included in Budget 2014 although the actual imposition will be in 2015. Assuming GST is tabled in Budget 2014, it would take around 14 months for GST to come on board. This is because of the processes that must take place to execute GST, such as the tabling of GST Bill in the Parliament that could involved at least two rounds of readings; the gazetting of GST Bill once approved by the Parliament; and the trial period to test the GST system especially between the Royal Customs and businesses for processing the input tax claims before the actual rollout of GST.
Resumption of subsidy rationalisation also looks imminent, but the process will remain gradual and the focus is to restructure the current “blanket subsidies” that benefit all and sundry to a more “targeted approach” that will benefit and reach the intended groups.
GST and subsidy rationalisation will be done as a package together with “offsets” such as continuing with the Bantuan Rakyat 1 Malaysia programme (BR1M – the cash handout to households with income of less than MYR3,000 per month done in the past two years, with a likely higher amount from MYR500
previously); adjustments in personal and corporate income taxes; GST exemptions on essential items such as basic foods like rice and milk products (e.g. baby’s formula); and GST implementation incentives or rebates for individuals and SMEs.
Review on pending mega-projects are also on the card, guided by the principle that any changes should not be at the expense of growth, and priority will be given to projects with high economic impact or multiplier effect and low import-content. This is partly to address the country's narrowing trade / current account surplus, although it will be a balanced approach via increasing exports as well, instead of just reducing imports. Indications are that the Government is committed to implement ETP and non-ETP approved projects, especially the private sector-funded infrastructure projects, but at the same time has identified projects that can be rescheduled.
Reinforces most of the points in our writeup yesterday, especially, our views that fiscal reforms will be acted upon in the upcoming Budget 2014 (to be tabled on 25 October), and possibly as early as next week following the Fiscal Policy Committee (FCP) meeting on Monday (2 September). To recap, the setting up of the FCP was announced by PM Najib at the Budget 2014 Dialogue on 18 June 2013. The FCP has convened last week and there will be another meeting next week on Monday. This underlines the sense of urgency by the Government to address the macroeconomic balance issue, and there might be announcements of policies and measures following Monday’s FCP. The hint at yesterday's briefing and Q&A session is that (i) subsidy rationalisation and (ii) the rescheduling of some major infrastructure projects, are the likely announcements by PM Najib next week.
MRT project should be safe from the chop. That the Government will continue to implement projects with "high multiplier effect, but low import content" reinforces our view that the MRT2 and MRT3 lines will continue to be implemented as the whole project is complementary to the subsidy reform agenda, critical for the improvement in the public transportation in Greater KL. Besides having a "high multiplier effect", the MRT2 and MRT3 lines also have "lower import content" since all the 10 tunnel boring machines for MRT1 are already procured (with 8 delivered) which can be used for MRT2/3 construction.
Eyes on Government land developments, KL-Singapore High Speed Rail (HSR). Going by the "high multiplier effect, but low import content" criteria in project reprioritisation, we take the view that this refers to major government land / real estate developments in the KL Central Business District (CBD). The KL-Singapore HSR also have quite a fair bit of "import content". As far as the progress of the KLSingapore HSR is concerned, PEMANDU commented that the
commercial evaluation process is completed, while the technical evaluation process is ongoing together with negotiations with the Singapore Government.
Implication on stocks
IJM Corp (IJM MK; BUY; MYR6.60 TP). The reassurance that private sector-funded infrastructure projects will continue, dispels concerns on the fate of the West Coast Expressway and Kuantan Port expansion – these two projects have a combined construction value of MYR8b which IJMC is eyeing, and which if secured, could significantly boost its outstanding construction order book of c.MYR2b. Maintain BUY.
Gamuda (GAM MK; BUY; MYR5.30 TP). Our view that the MRT2/3 lines will proceed lift Gamuda's prospects with its share price hit recently by concerns of a deferment in the MRT2/3 lines. Gamuda, together with its partner in MRT1, MMC, stand to gain as a joint project delivery partner and contractor for the tunnel works. So far, the MRT1 construction has chart good progress with a 24% completion milestone (35% at the tunnelling works portion, 16% at the elevated sections). This is positive for Gamuda-MMC's vie for the MRT2/3. Maintain BUY. A possible set-back to these two stocks is their high foreign shareholding – 43% at IJMC and 46% at Gamuda (both as at end-July 2013).