Malaysia’s 2017 Budget Is A Pre-Election One

Malaysia’s 2017 budget is a pre-election one. Although not scheduled to be held until mid-2018, the new proposed budget is looking ahead to the country’s vote and sticks to a path of fiscal consolidation, which could enhance foreign investor confidence. A lower equity risk premium could also offer support to the ringitt (MYR), Malaysia’s official currency, in the medium term.

However, the MYR remains susceptible to the pace of US Fed tightening and fluctuating oil prices in the weeks ahead. Despite Malaysia having reduced its dependence on oil-related revenues, USD/MYR is expected to head for a 4.30 level ahead of the December FOMC meeting, but retreat post the Fed’s gathering, according to Qi Gao, Singapore-based FX strategist with ScotiaBank.

Malaysia’s Prime Minister and finance minister Najib Razak this month presented the “Budget 2017.” In it, the government has allocated MYR 260.8 billion (USD 62.4bn) for the year’s budget, an increase of 3.44% from 2016. Revenue collection will also be expanded at 3.35% to MYR 219.7 billion to achieve a fiscal deficit target of 3.0% of GDP. Total tax revenue is expected to rise 8.1% and the government has proposed to reduce the corporate tax for the year of assessment 2017 and 2018. In addition, the government plans to enhance affordability for first-time home buyers and upgrade hospital facilities.

Malaysia’s fiscal deficit is now projected to fall to 3.0% of GDP in 2017, down from 3.1% in 2016. The budget sticking to a fiscal consolidation path is expected to enhance foreign investor confidence, lower equity risk premium and provide support to the MYR in the medium term.

The Weakest Link?

Malaysia’s currency is looking more and more to be the weakest link among Asia EM. Although the recent USD rally and sell off across fixed income markets seems to have eased, a number of uncertainties still lie ahead, most notably the US election and the risks surrounding the November vote, a Fed interest rate hike in December and the initiation of Article 50 when the United Kingdom formally moves to “exit” the Euro bloc.

“This prompts us to do a quick vulnerability check of EM Asia to assess which countries are most exposed to a drop in risk appetite and reversal of capital flows,” Claudio Piron, Singapore-based emerging Asia FX strategist and managing director with Bank of America Merrill Lynch (BofAML) wrote in a note to clients on October 21.

“Overall, we find that the Malaysia ringgit is still the most vulnerable while India and Thailand seem to be the most insulated. While Korea, Taiwan, Thailand and China have sufficient buffers in place, they are most likely to let their currencies weaken. Indonesia has bought a lot of FX reserves this year and is mostly likely to keep Rupiah in a range.”

Photo Credit: najibrazak.com