PETALING JAYA, FEB 1: Analysts have revised downwards Malaysia’s gross domestic product (GDP) growth forecast for 2016 following the recalibrated 2016 Budget announced last Thursday.
Hong Leong Investment Bank (HLIB) Research has cut its 2016 GDP growth forecast by 0.3% to 4.2% to reflect lower government spending and lower Petroliam Nasional Bhd (Petronas) expenditure, which will be partially offset by higher private consumption growth.
“The recalibrated budget (lower oil revenue of RM7-RM9 billion, offset by other revenue gains and spending cuts), is overall negative on GDP growth. Despite the potential spectrum tender revenue (RM4.5 billion) and reduction in duty loss (RM1 billion), there is still a net spending cut of RM2-RM4 billion,” it said in a report on Friday.
Under the recalibrated budget, the government narrowed its GDP growth forecast to 4-4.5% from 4-5% previously, while maintaining the budget deficit target at 3.1% of GDP this year.
HLIB Research said the GDP downgrade does not warrant an imminent overnight policy rate cut. However, the statutory reserve requirement may be cut again in the first half of 2016 (1H16) should capital outflows persist amid aggressive deposit campaign by banks to comply with Basel III requirements.
On impact to the market, HLIB Research said the recalibrated budget removes some macro risks but introduces uncertainty to the telecommunication (telco) sector and sentiment is expected to remain negative on the sector until there is clarity on the spectrum tender.
However, it has a positive outlook for the consumer sector but impact on big-ticket items such as property and automotive are limited.
It is also positive on the brewery and tobacco sectors due to the stricter enforcement on duty-free islands while construction remains the clear winner due to the government’s commitment to prioritise road and public transport projects.
“We lower our end-2016 FBM KLCI target to 1,760 (previously 1,820) based on 15 times (previously 15.5 times) of one-year forward earnings to reflect downward bias in GDP growth and uncertainty in telco policy,” it said.
On the ringgit, it said macro risks surrounding the oil price slump are diminishing and coupled with the dovish US Fedseral Reserve statement, the recalibrated budget may support the case of ringgit appreciation with a more pace in 2H16. It maintained its year-end forecast at RM3.80-RM4 to the US dollar.
BIMB Securities Research revised lower its 2016 GDP growth forecast to 4.3% from 4.6% previously, but maintained its 2015 GDP growth forecast of 5%.
“Looking ahead, Malaysia remains susceptible to both anticipated as well as unanticipated external developments, especially in the asset markets. These include continuing net outflows in portfolio investment, especially from debt securities and equities, declining prices of commodity exports and rising volatility and uncertainty in global financial markets,” it said in its report.
It said domestic demand will continue to be the driver of growth this year albeit at a more subdued pace while weak performance of private investment could possibly turn for the worse, especially with higher-than-expected borrowing costs and uncertain investment adjustment costs.
“Households, producers, exporters, importers and retailers are adjusting to higher import prices and rising debt service charges, following the significant depreciation of the ringgit,” it added.
BIMB said the recalibrated budget is more supportive for consumption but fiscal consolidation is now further constrained by falling oil prices and the government has a tough task ahead as it tries to support growth and adhere to its fiscal stance.
“Although meeting the 3.1% deficit target is desirable, a slight deviance may not disrupt market confidence especially if growth can be maintained. For this, the government will have to show that it can achieve more with less.”
It added that a higher collection from the Goods and Services Tax may help offset the oil revenue shortfall and help the government meet its fiscal deficit target without affecting growth too severely.