Malaysia unveiled an expansionary budget for 2024 with a twin focus on boosting economic resilience and addressing the key issues of the day that impact the lives of its people. Budget 2024 is the largest budget ever to be tabled in Malaysia’s history with a total allocation of RM393.8 billion. It is encouraging to note that the government is optimistic about the GDP for 2024 and expects it to grow in the 4-5% range, in line with the projections of the World Bank and the International Monetary Fund (IMF).
Franklin Templeton head of Malaysia business Hanifah Hashim said overall, the Budget 2024 is well balanced, emphasising good governance, fiscal responsibility, and a focus on the welfare of its people.
The 2024 budget sets a fiscal deficit target of 4.3%, demonstrating the government’s commitment to reform the economic structure whilst reducing fiscal deficit in stages. A lower fiscal deficit target, and a capped debt-to-GDP ratio all bode well for the bond market.
With the planned reduction in fiscal deficit, Franklin said it forecasts a reduction of government bond supply over the next few years. The financial discipline put in place should also appeal to foreign investors through portfolio inflow and this will support local bond yields as well as the Malaysia Ringgit.
However, in the short term, there is a risk of a potential increase in government bond supply especially on the longer end, due to the conversion of short-term Treasury Bills to longer-tenor government bonds. In addition, inflation may still linger in 2024 due to the incremental increase of 2% of Sales & Services Tax (SST) to 8%, and the removal of the price ceiling for chicken and eggs. Although petrol subsidy rationalisation was not announced in this Budget 2024, the projected inflation of 2.1%-3.6% seems to imply that this may be executed in 2024. As the petrol subsidy rationalisation scheme remains opaque at this juncture, the bond market has yet to price in this event. Bond yields should be supported once inflation uncertainties stabilise and prove to be manageable in the medium term.
Although the government bond market is expected to be volatile with an upward yield bias during this period, the corporate bond market should do well as there is a window of opportunities for corporations to raise funds with attractive spreads above the government bond yields. We expect construction sector bonds to do well if infrastructure spending is carried out in a timely manner in 2024. Furthermore, in its view, continued emphasis on the road infrastructure projects in East Malaysia which includes the Pan Borneo Sabah and Sarawak-Sabah Link Road (SSLR) Phase 2 projects, will prompt more construction companies to tap the bond market to seek funding, as well as some projects to be funded through government guaranteed issuance.
On the other hand, the property segment is expected to remain lacklustre despite some initiatives to revive abandoned projects and relaxation of residency through investments, Malaysia My Second Home MM2H requirements. With lower net disposable income (from higher SST and higher prices of basic goods like chicken and eggs, which will cause multiplier effect on food prices in restaurants etc) coupled with higher Overnight Policy Rate and a poor rental market, demand for property is unlikely to increase sharply in 2024. The government’s allocation of RM2.47 billion for housing projects in 2024, including RM1 billion to support reputable developers in restoring abandoned projects, is commendable and contributes significantly to property sector revitalization and housing development.
Sustainability and energy transition are key priorities in Budget 2024, with support for Sustainable and Responsible Investment (SRI) and the issuance of a biodiversity sukuk. Hanifah said we might see more primary corporate bond issuances from the renewable energy space, especially from the solar industry which is positive news for the domestic bond market
