2014 Budget: Implications On Infrastructure Capex

BMI View: The recent unveiling of Malaysia's budget for 2014 presents some positive upside risk to our long-term forecasts for Malaysia's infrastructure and construction sector. This is because the government has taken decisive steps to address its fiscal problems and has maintained its development plans for the residential and infrastructure sectors. However, we continue to expect construction growth in Malaysia to experience a near-term slowdown given the completion of several large-scale infrastructure projects. In addition, excessive welfare spending is still detracting from public development spending.

On October 25 2013, Malaysian Prime Minister Najib Razak unveiled the country's budget for 2014. The focus of the budget was on addressing the country's persistent fiscal deficits and growing indebtedness and we believe the measures introduced in the budget (such as the implementation of the Goods and Services Tax [GST] and the reduction of the total subsidy bill) are decisive steps to bring the country's fiscal accounts back in order ( see '2014 Budget: A Step In The Right Direction', October 29 2013).

This is a positive development for Malaysia's construction sector over the long-term. Not only could it reduce the borrowing costs for state-linked companies over the coming years, but it could also allow the government and its state-linked companies to divert resources away from welfare subsidies and into more productive sectors to further economic and social development within the country.

Rising Public Spending
Malaysia - Public Sector Development Expenditure, MYRbn

BMI View: The recent unveiling of Malaysia's budget for 2014 presents some positive upside risk to our long-term forecasts for Malaysia's infrastructure and construction sector. This is because the government has taken decisive steps to address its fiscal problems and has maintained its development plans for the residential and infrastructure sectors. However, we continue to expect construction growth in Malaysia to experience a near-term slowdown given the completion of several large-scale infrastructure projects. In addition, excessive welfare spending is still detracting from public development spending.

On October 25 2013, Malaysian Prime Minister Najib Razak unveiled the country's budget for 2014. The focus of the budget was on addressing the country's persistent fiscal deficits and growing indebtedness and we believe the measures introduced in the budget (such as the implementation of the Goods and Services Tax [GST] and the reduction of the total subsidy bill) are decisive steps to bring the country's fiscal accounts back in order ( see '2014 Budget: A Step In The Right Direction', October 29 2013).

This is a positive development for Malaysia's construction sector over the long-term. Not only could it reduce the borrowing costs for state-linked companies over the coming years, but it could also allow the government and its state-linked companies to divert resources away from welfare subsidies and into more productive sectors to further economic and social development within the country.

Rising Public Spending
Malaysia - Public Sector Development Expenditure, MYRbn

However, over the near-term, it appears that the effects of welfare spending (which are still excessive) will have negatively impact on investment. A breakdown of the government's expenditure plans showed that the combined expenditure from the public sector on economic and social development is set to fall by 9% in 2014 when compared to 2013. In fact, if we remove the expenditure from state-linked companies, the government's expenditure on development has remained relatively stagnant over the past five years, with federal spending on infrastructure on a decline since its peak in 2011.

Declining Federal Infrastructure Spending
Malaysia - Federal Government Development Expenditure, By Key Construction Sectors, MYRbn (LHS); In Comparision To Other Sectors, 2013e, MYRbn (RHS)

However, over the near-term, it appears that the effects of welfare spending (which are still excessive) will have negatively impact on investment. A breakdown of the government's expenditure plans showed that the combined expenditure from the public sector on economic and social development is set to fall by 9% in 2014 when compared to 2013. In fact, if we remove the expenditure from state-linked companies, the government's expenditure on development has remained relatively stagnant over the past five years, with federal spending on infrastructure on a decline since its peak in 2011.

This means that for the government to implement its investment plans, it will continue to require greater foreign and private sector investment in Malaysia. So far, the government has been very successful in attracting investment for its 10-year economic plan, the Economic Transformation Programme (ETP). According to a recent report published by the Performance Management & Delivery Unit in August 2013, 86% or MYR25.4bn (US$8.0bn) in committed investments for projects in 2011 and 2012 have already been realised, and the ETP is right on track to meet its 2013 targets.

The public sector will also require greater access to financing for its investment plans and so far, it has been very successful in securing financing through the use of Islamic bonds, known as sukuk. Data from Malaysia' Securities Commission showed that Malaysia accounted for around 70% of all new sukuk issuance globally between January and August 2013. We expect Malaysia to continue to enjoy success with securing infrastructure financing through Islamic bonds. The country had recently established the world's first comprehensive legal framework on Islamic banking, indicating that it is keen to reinforce its position as a leader in the Islamic banking industry.

Malaysia The Global Sukuk Leader
New Sukuk Issuance, January-August 2013, By Country, %

Investment Plans Largely Intact

During the 2014 budget, the government had also reiterated its commitment to improve the country's transport infrastructure. Najib had specifically stated that the urban railway project in Kuala Lumpur, the Ipoh-Padang Besar-Johor Baru double-tracking railway project and the West Coast expressway would continue to be implemented, with MYR2.9bn allocated to upgrade rail tracks across Malaysia.

There have been concerns that some of the government's large-scale construction projects with 'low-multiplier effect and high import content' could be postponed as part of its fiscal reform plans, but so far, these projects, which centres around improving rail connectivity with Singapore, remain on track ( see 'Construction Outlook: Fiscal Risks To The Fore', September 11 2013).

The government has also stated that it will provide additional financing to improve tourism-related infrastructure such as airports and hotels. MYR700mn will be allocated for the construction of a new air traffic management centre at the Kuala Lumpur International Airport (KLIA), while MYR312mn will be allocated to upgrade several airports in Sabah and Sarawak. In addition, MYR2bn will be allocated to the Special Tourism Infrastructure Fund to provide soft loans for the construction of hotels, resorts and theme parks.

Residential: Boosting The Lower End

During the 2014 budget, the government had also reiterated its aim to improve housing affordability in Malaysia via demand-and supply-side measures. To reduce property prices, the government has significantly increased the real property gains tax (RPGT) for properties disposed within a holding period of less than five years (effective as of January 1 2014), particularly for foreign buyers. Developers are also prohibited from implementing projects that have features of the Developer Interest Bearing Scheme (DIBS) - the scheme had allowed developers, particularly at the high-end segment, to absorb interest payments during the property's construction phase.

Malaysia - Real Property Gains Tax From January 2013 and January 2014, By Type
Date Type Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 And Beyond
Jan-13 Companies 15% 15% 10% 10% 10% 0%
Individuals 15% 15% 10% 10% 10% 0%
Individuals (foreigners) 15% 15% 10% 10% 10% 0%
Jan-14 Companies 30% 30% 30% 20% 15% 5%
Individuals 30% 30% 30% 20% 15% 0%
Individuals (foreigners) 30% 30% 30% 30% 30% 5%
Source: BMI, Lembaga Hasil Dalam Negeri Malaysia, Ministry Of Finance, The Star

We believe these measures are most likely to lead to further declines in property prices, particularly for the high-end segment. Speculative activity and foreign purchases have been largely focused in the high-end housing market, thus these schemes should weaken the demand for such houses. This will in turn deter developers from constructing new residential projects at the high-end segment, resulting in a decline in building activity from that segment.

Ripe For Further Price Falls
Malaysia - Residential Property Incoming Supply And Planned Supply, '000 unit (LHS); And Housing Price Index, 2000=100 (RHS)

Besides anti-speculation measures, the government is exempting property transactions from GST and introducing the Private Affordable Ownership Housing Scheme (MyHome). Under the scheme, private developers will received a MYR30,000 subsidy for each housing unit in a housing project if they build at least 20% low-cost houses (maximum price of MYR45,000) and 20% medium-cost houses (maximum price of MYR170,000) in the housing project. Only 10,000 units will be eligible for the MyHome scheme in 2014.

These measures could incentivise developers to build affordable housing (classified by the Malaysian government as having a price range of MYR100,000 to MYR400,000 per unit), thus softening the blow from a decline in building activity from the high-end segment. One of the key targets of the government is to provide housing for one million affordable houses by 2020 and if achieved, will create significant residential building activity. In addition, the government has plans to provide 80,000 affordable homes under its 1Malaysia Housing Programme (launched in January 2013), with 20,000 houses already under construction at the end of June 2013.

Near-Term Slowdown Still Expected

Overall, we continue to expect construction growth in Malaysia to experience a near-term slowdown given a decline in public investment and the completion of several large-scale infrastructure projects such as the Kelana Jaya and Ampang rail extension projects in Kuala Lumpur and the budget terminal in KLIA. We are forecasting real growth for Malaysia's construction sector to reach 6.7% in 2014, compared to and 18.1% in 2012 10.1% in 2013.

Moderating
Malaysia - Construction Industry Value Forecasts

However, over the long-term, we do highlight that the government's development and fiscal plans present an upside risk to our long-term forecasts for the construction sector. At present, we are forecasting real growth for the construction sector to average 4.7% per annum between 2015 and 2022.

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Sector: Infrastructure
Geography: Malaysia
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