The 2019 Budget is set to restructure Malaysia’s fiscal position through the implementation of tough measures aimed at narrowing the fiscal deficit, while remaining focused on the need to accelerate economic growth and improve the well-being of the people.
Franklin Templeton GSC Asset Management Sdn Bhd chief executive officer Hanifah Hashim said the government had recognised the need to strike a balance and if well executed, the budget could boost opportunities for investment, harness positive business sentiment and drive consumer demand.
“We are cautiously optimistic that the 2019 Budget is the short-term reset needed to put the country back on the right footing to meet the challenges that lie ahead.
“As the 2019 Budget refocuses the economy, we may see some negative impact on financial markets. However, we are confident the government is on the right path in systematically reducing the fiscal deficit and moving towards sustained economic growth,” she said in a statement today.
Hanifah, who is also Franklin Templeton’s head of Malaysia Fixed Income and Sukuk, pointed out that the higher-than-expected budget deficit target announced at 3.7 percent of gross domestic product for 2018 is expected to create volatility for the markets in the short term.
She said the fiscal consolidation plan in 2019 at 3.4 percent, 2020 at 3.0 percent, 2021 at 2.8 percent and subsequent years at around 2.0 percent may cause a re-evaluation of Malaysia’s sovereign credit rating.
Expects local bond market to be impacted
Hanifah said she expected the local bond market to be impacted for the remainder of 2018, owing to the higher than anticipated issuance of government bonds, in line with the higher fiscal deficit of 3.7 percent.
While Franklin Templeton expects yields of government bonds to rise in the short term, the plan for fiscal consolidation in 2019, could see lower government bond issuances next year onwards.
“This may offer some stability due to potential tightening of yields in the future, especially if the bond market starts to price in the potential reduction of the overnight policy rate by Bank Negara Malaysia, to support growth,” said Hanifah.
With regard to the ringgit, the firm believes the government’s higher budget deficit would make the currency susceptible to short-term pressures as concerns on the rating outlook for Malaysia, and uncertainty in the global economic backdrop, might lead to a continuous net capital outflow and discourage offshore investors from investing in Malaysia.
“Additionally, with the higher reliance on Petronas dividends to finance government revenue, we believe that the ringgit could experience higher volatility, as capital market players once again associate the highly volatile crude oil prices to government oil-related revenue, similar to the 2010-2016 period,” Hanifah said.