Malaysia needs to get GE15 out of the way to effectively address fiscal constraints, says Maybank Research

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KUALA LUMPUR (Jan 4): Malaysia needs to get the 15th general election (GE15) out of the way in order to see through fiscal policy changes that could put the country on a better footing, which in turn would bode well for a market recovery, said Maybank IB Research.

This is as the country increasingly depends on the corporate sector to subsidise its fiscal gap, in the absence of support from the consumer sector and the narrowing gap for the government to borrow, said Maybank Kim Eng Head of Regional Equity Research Anand Pathmakanthan.

For one, the non-recurring 33% Cukai Makmur — for companies with earnings above RM100 million this year — plays a huge factor in the 6.7% average year-on-year earnings contraction forecast for the year 2022 across the 15 sectors under Maybank IB Research’s coverage.

Concurrently, Malaysia is set to introduce its Medium-Term Revenue Strategy by mid-2022 to broaden its revenue base, but that is seen as an uphill task with the general election a possibility from now until July 2023.

“The best hope for our markets to have a speedy recovery or to regain positive traction is to get the election out of the way.

“It’s not the election per se, but the issues around fiscal policy and how vulnerable the corporate sector is at the moment to fiscal tapping by the government,” Anand said during the Maybank IB 2022 Outlook webinar.

“The market is aware that the government fiscal position is stretched, and there are no cuts planned in terms of fiscal spending by the government. What has to happen for the budget deficit to meet our target of coming below 6% is for revenue to go up as well.

“Where is that revenue going to come from? It can’t come from the consumer sector, as household debt-to-GDP (gross domestic product) is above 90%. The prime minister committed to a deficit-to-GDP below 6%, and federal government debt-to-GDP is at record level. That leaves the corporate sector to fill the fiscal gap,” he added.

Anand added that it is unlikely for the ruling government to recommend indirect tax like the goods and services tax (GST) to be reintroduced before election, as a populist shift is to be expected.

“You have to get election out of the way first before you can have significant changes in the revenue or tax structure that will take pressure off the corporates always stepping in to help the government raise revenue,” he said. “That’s the main risk we see to market performance this year.”

However, Maybank Research sees much improvement in corporate earnings in 2023, as companies come off the effect of Cukai Makmur, and ride on the economic recovery that is expected to continue with better predictability.

The research house has set its end-2022 KLCI target at 1,710 points, premised on expectations of mid-teens earnings growth in 2023 after an estimated 7.4% contraction in 2022.

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