Malaysia Budget 2014: Good Budget?

The government has kept to its commitment of fiscal austerity without sacrificing economic growth when it outlined the 2014 Budget. It is a good budget. The only 0.3 per cent year-on year rise to RM262.2 million in total government spending does not impede progress as the government still projects a healthy gross domestic  product expansion of 5.0 per cent to 5.5 per cent next year with strong private-sector participation.

Nonetheless,  the  rising  allocation  for  operating  expenditure  vis-à-vis  development expenditure is a concern and should be addressed by trimming overlapping agencies. It was at  78.2  per  cent  of  total  expenses  in  2008  but  has  risen  to  83  per  cent  next  year  at  the expense of development expenditure. No major surprises in 2014 Budget as measures like the goods and services tax (GST), cut in sugar subsidies and harsh measures to curb property market  speculations  came  within  market  expectations.  Cut  in  corporate tax  and  individual income tax should not cause excitement as it was an“after effect” to compensate for the six per cent value added tax.

Telcos will be one of the beneficiaries as they may no longer need to absorb the current six per  cent  services  tax  imposed  on  prepaid  subscribers.  DiGi and  Maxis are  the  biggest winners  in  relation  to  their  prepaid  contributions. Manufacturers  should  benefit  too. Construction players will benefit from government spending on infrastructure projects. The absence of any drastic subsidy cuts, except for the 34 sen in sugar subsidies, removed the short-term downside pressure on corporate earnings.

However,  that  does  mean  the  electricity  tariff  and  gas  price  hikes  are  off  the  radar.  After much delay, the expected increase in energy prices could finally materialise in 1Q14 as the government  addresses  the  issue  once  and  for  all  with  the  implementation  of  the  fuel  cost pass  through  mechanism  under  the  proposed  incentive-based  regulation  tariff  framework.
So, if there is any correction in Tenaga Nasional Bhd’s share prices due to the missing link, it  should  be  a  buying  opportunity.  The  cut  in  sugar subsidies  will  only  have  a  very  minor impact  on  Felda  Global  Ventures (FGV)  as  contributions  to  bottom  line  from  sugar businesses are minimal (impacts on FY13 and FY14 net profits were -1.0 per cent and -1.2 per cent respectively). As such, buy FGV on price weakness.

Share prices of property stocks have already discounted the news and any further weakness should be an opportunity to accumulate as real-estate prices should rise with the onset of GST. The  increase  in  Real  Property  Gain  Tax  (RPGT)  does  not  impede  purchasing  power  but merely  lowers  future  profits.  Expectations  of  higher  prices  will  offset  lower  profits  from RPGT but the real impact will only be felt when interest rates rise to a level that would hurt disposable income. We may not see that level until  in the later part of 2015. So, make hay while the sun shines

by TA Securities