Expert optimistic despite ‘short-term volatility’

KUALA LUMPUR: The 2019 Budget is set to restructure Malaysia’s fiscal position through tough measures aimed at narrowing the fiscal deficit, while remaining focused on the need to accelerate economic growth and improve the wellbeing of the people.

Franklin Templeton GSC Asset Management Sdn Bhd chief executive officer Hanifah Hashim said the government had recognised the need to strike a balance and if well executed, the budget could boost opportunities for investment, harness positive business sentiment and drive consumer demand.

“We are cautiously optimistic that the 2019 Budget is the shortterm reset needed to put the country back on the right footing. As the 2019 Budget refocuses the economy, we may see some negative impact on financial markets. However, we are confident the government is on the right path in systematically reducing fiscal deficit and moving towards sustained economic growth,” she said in a statement yesterday.

Hanifah said the higher-thanexpected budget deficit target announced at 3.7 per cent of gross domestic product for 2018 was expected to create volatility for the markets in the short term.

She said the fiscal consolidation plan in 2019 at 3.4 per cent, 2020 at 3.0 per cent, 2021 at 2.8 per cent and subsequent years at around 2.0 per cent might cause a re-evaluation of Malaysia’s sovereign credit rating.

Hanifah said she expected the local bond market to be impacted for the remainder of this year, owing to the higher than anticipated issuance of government bonds, in line with the higher fiscal deficit of 3.7 per cent.

While Franklin Templeton expects yields of government bonds to rise in the short term, the plan for fiscal consolidation in 2019, could see lower government bond issuances next year onwards.

“This may offer some stability due to potential tightening of yields in the future, especially if the bond market starts to price in the potential reduction of the overnight policy rate by Bank Negara Malaysia to support growth,” said Hanifah.

With regards to the ringgit, the firm believed the government’s higher budget deficit would make the currency susceptible to short-term pressures as concerns on the rating outlook for Malaysia and uncertainty in the global economic backdrop might lead to a continuous net capital outflow and discourage offshore investors from investing.

“With the higher reliance on Petronas dividends to finance government revenue, we believe that the ringgit could experience higher volatility, as capital market players once again associate the highly volatile crude oil prices to government oil-related revenue, similar to the 2010-2016 period.”