Press statement – 29 January 2016, Penang
Dr Lim Kim-Hwa, Chief Executive Officer and Head of Economics
Mr Tim Niklas Schoepp, Chief Operating Officer
Dr Lim Chee Han, Senior Analyst
Dr Negin Vaghefi, Senior Analyst
Ms Ong Wooi Leng, Senior Analyst
In view of the changes in economic circumstances, the Prime Minister announced a few changes to the Budget 2016 yesterday.
Overall, we believe that the Budget recalibration has adopted some necessary measures whilst some others might have negative consequences. Probably also due to an overall improvement in sentiment globally, the Ringgit as well as the Malaysian stock market has risen on 29 January 2016.
Crude oil price assumption of USD30-35 per barrel
There are competing views on whether crude oil prices (currently around USD 33 per barrel) will fall or rise in the future. Nevertheless, the revised assumption from USD48 per barrel would seem more realistic due to the recent slide in oil prices. Therefore, this is an important step towards putting the Government’s revenue on a more realistic footing.
As crude oil is traded in USD whilst the Government revenue is measured in Ringgit, a fluctuating Ringgit will help insulate a fall in crude oil price but at the same time reduce its contribution should crude oil price rallies. Therefore, the relationship is not necessarily linear.
We show in the table below that Petronas dividends are likely to range between RM10.9 billion (oil price of USD 30 per barrel and USDMYR of 4.0) to RM14.0 billion (oil price of USD 35 per barrel and USDMYR is 4.4). Compared to the old assumption of USD 48 per barrel made in October 2015, dividends would have fallen from RM 17.4 billion (assuming USDMYR 4.0) to RM 19.2 billion (assuming USDMYR 4.4). In whichever case, dividends would have fallen substantially from the actual dividends of RM 27 billion in 2013.
We highlight that Petronas dividends is only one source of revenue related to crude oil price. The Government also receives oil related taxes and export duty. The impact on these have not been estimated.
Cut in employee’s contribution to EPF
The cut in contribution will certainly provide short term boost to disposable income, thereby increasing domestic consumption which has fallen since the introduction of the Goods and Services Tax in April 2015.
Domestic consumption has powered Malaysian economy after the 2008/9 financial crisis. Whilst it is good to have a balanced economy, the increase in domestic consumption has also matched the increase in household debts. Such an increase is worrying since household debts are already high (87.9% of GDP based on preliminary 2014 numbers from Bank Negara).
Besides, debts are also concentrated in the lower income households (in 2013, 26.7% of debts are from those earning RM 3,000 and below). Therefore, the cut in EPF contribution will also have the effect of helping overly levered households service their debts. An increase in domestic consumption will likely to yield higher GST revenue (unless expenditure is spent on zero rated or exempt) items.
However, whilst reducing forced savings for 22 months (March 2016 to December 2017) via such a cut will boost the economy in the short term, individuals are at risk of having a smaller retirement pot at their retirement. Whilst the value not saved today might be low, the effect of compounding will amplify the shrinkage in the retirement pot. After all, the EPF highlighted that a retirement pot of RM 196,800 is needed to allow a RM800 per month retirement for 20 years but only about 20% of EPF members have that amount when they retire in 2015.
Besides, employees’ contribution to EPF is considered tax free in general. Therefore, opting for a lower contribution is more likely to yield higher net income after tax but also a higher income tax bill as the higher income (net of EPF contribution) is not shielded from the taxman.
Therefore, the cut in employee’s contribution should be positive to the economy in the short term but a prolonged cut would be detrimental to the retirement of many.
Commitment to neither impose capital controls nor peg the Ringgit
This is an important commitment as it will not encourage a rush to exit from Malaysia as a panic withdrawal would destabilise the economy. With this commitment, the Government is more likely to be able to continue to attract foreign investors to invest in domestic debt. As of the 3rd quarter in 2015, foreigners hold RM152 billion (45% of Malaysian Government Securities of RM 337 billion) or RM 166 billion (28% of Federal Government debt issued domestically of RM 601 billion).
However, given that foreign ownership of domestic debt is high, the Government should be cognizant of the vulnerability of capital withdrawal. A drastic withdrawal will likely affect the interest rate environment in Malaysia. With high foreign participation in the debt market, maintaining Malaysia’s sovereign credit rating becomes more important.
Housing for the poor
The Government has decided that all houses priced at RM 300,000 and below must be sold to the first-time buyers only. This will reduce the likelihood of hoarding or speculation in this segment of the market. With the slow-down in the property market and the tightening of lending criteria, this decision is likely to have marginal effect on property prices in cities like Kuala Lumpur and Penang.
Sale of telecommunication spectrum
There have not been much details on this, but an overly successful (i.e. one that generates very high revenue) sale of telecommunication spectrum would increase the capital investment cost of operators in mobile telephony who might ultimately pass on the cost to the consumers. Therefore, a transparent open bidding process together with sufficient number of competitive operators is needed to ensure that the Government’s revenue is maximised and consumers’ welfare is safeguarded.