Malaysia on track to meet budget targets

Deficit to only hit 3% of GDP in 2017, said analyst.

Malaysia's 2017 budget succeeds in striking a balance between remaining on the path of fiscal consolidation and retaining government support from key powerbases as the ruling party seeks to shore up its position following a year of considerable political instability, said BMI Research.

The research firm believes that the government is likely to achieve its goals given the targeted nature of its spending, and it forecasts the deficit in 2017 to come in at 3.0% of GDP (from 3.1% of GDP in 2016).

Here's more from BMI:

Given that the government obtains most of its revenue from direct taxes, we believe that it will likely meet its revenue collection targets (which the government forecasts to grow by 3.0% y-o-y) as we expect economic growth to pick up in 2017. Our 2017 real GDP growth forecast of 4.7% is largely in line with the government's forecast of 4.0-5.0%. Ongoing efforts to further strengthen the collection of the 6.0% goods and services tax (GST) that was implemented in 2015 will provide further support for the government's coffers. In an effort to improve tax collection, Najib announced the setting up of the Collection Intelligence Arrangement (CIA) agency that will be especially tasked to 'enhance efficiency in tax collection and compliance'.

In addition, while Malaysia has been gradually diversifying its revenue collection away from oil-related sources, we believe that the stabilisation and pick up in oil prices will help the government achieve its revenue collection goals. Indeed, our Oil and Gas team forecasts Brent to average USD55.00/bbl in 2017, a figure that is considerably higher than the government's forecast of USD45.00/bbl. Given that the oil-related revenues accounted for 21.5% of revenue in 2015, this is likely bode well for revenue growth.

Targeted Spending To Limit Excesses

On the other hand, the government has also sought to curb unnecessary expenditures as it seeks to shore up its support among key powerbases. As such, most of the operating expenditure will be aimed at addressing short-term problems in a bid to retain support ahead of the general elections that must be held by 2018. We believe that the targeted nature of this spending will enable the government to maintain its forecasted expenditure rate of 3.4% y-o-y.

In addition, the gradual reduction of subsidies will provide some support. It was announced that cooking oil would no longer be subsidised and that subsidy allocations would fall considerably to MYR10bn from MYR26.1bn in 2016. These savings thus represent a continuation of the government's efforts at subsidy rationalisation and are likely to continue over the coming years.

Measures To Boost Popularity Pose Downside Risks To Forecast

Despite stating the need to remain on the path of fiscal consolidation, the budget saw an increase in the amount of government handouts to key support groups including poorer households, civil servants, and religious leaders. It was announced that the allocation for Bantuan Rakyat 1 Malaysia (BR1M) would be increased to MYR6.8bn in 2017 from MYR5.4bn previously. In a bid to help lower income groups cope with the rising costs of living, various groups will see their handouts increase by MYR50-250, depending on their income levels. The increase will see low-income households earning below MYR3,000 monthly get a one off handout of MYR1,200, while households earning between MYR3,000 and MYR4,000 monthly will get MYR900. Single individuals will get a one off MYR450. While such direct transfers are not sustainable, this is likely to have been obtained from the GST takings, which are estimated to increase the state's revenue by MYR40bn in 2017, in adhering to Putrajaya's commitment to fiscal discipline.

Other measures aimed at retaining support among BN's largely rural, Malay powerbase include spending to improve infrastructure in rural areas, with a focus on states like Sabah and Sarawak (traditional BN strongholds) following BN's landslide victory during the Sarawak state elections in May 2016. Furthermore, rice farmers and fishermen will obtain more government support, while funds will be provided to modernise agriculture.