KUALA LUMPUR: The continued slump in oil prices has triggered concerns that the government will reduce its development expenditure as its earnings get impacted, but analysts and economists reckon that the rollout of key infrastructure projects is unlikely to be scaled down or delayed this year.

“I suspect the government will revise Budget 2015 to meet its target to reduce fiscal deficit to 3% in 2015. Perhaps they may cut some expenditures but I don’t think they will cut those that they have committed to, such as construction and infrastructure projects, which we view as strategic to the country’s development,” MIDF Research chief economist Maslynnawati Ahmad told The Edge Financial Daily in a telephone conversation.

HLIB Research analyst Low Yee Huap too is of the opinion that the plunging oil prices — Brent crude was at US$50.62 (RM180.20) per barrel last Friday, down 56% from US$115.06 per barrel on June 19 last year — will not have a significant impact on the construction sector as he believes that any earnings lost will be offset by the government’s subsidy rationalisation, which could yield RM12 billion in savings.

“Most construction projects are carried out out of the government’s balance sheet and operated by special-purpose vehicles such as MRT Corp and Prasarana Malaysia Bhd.

“Even if development expenditure is slashed due to lower oil prices, this should not adversely impact the roll-out of mega projects,” Low said, adding that the construction sector is expected to remain overweight in the next one to three years.

Echoing Maslynnawati and Low’s views, RHB Research analyst Joshua Ng said the current momentum of construction activities will be sustained on the back of ongoing mega infrastructure projects such as the mass rapid transit (MRT) projects in the Klang Valley worth RM73 billion, six toll highways (RM20.5 billion), Petroliam Nasional Bhd’s refinery and petrochemical integrated development (RM89 billion) and Penang’s transport master plan (RM27 billion), among others.

“Speculation is rife that the government may cut development expenditure on expectations of falling oil revenue. This is a valid concern [but] as it stands today, there is little chance that this scenario will play out, given the government’s strong commitment towards public infrastructure spending and the absence of another leg down in crude oil prices,” said Ng.

“The budget highlighted several major expressway and rail projects. The funding for these projects does not normally come from development expenditure. We believe that construction is expected to be implemented via a build-operate-transfer model,” Ng said, adding that RHB Research is maintaining an “overweight” call on the construction sector.

Both Kenanga Research and UOB Kay Hian Research also rated the construction sector as “overweight”.

Former RAM Holdings Bhd group chief economist Dr Yeah Kim Leng thinks the government should revise the latest budget and align construction expenditures to minimise impact on the country’s economic growth this year.

“Construction activities are a boon to the country’s growth, but with a challenging environment, the government may want to scale down certain projects that are unnecessary. Spending needs to be aligned and expenses need to be reviewed, but those that have been committed to must be delivered prudently,” he said, noting that construction contributes between 3% and 4% to the country’s growth.

In the Budget 2015 speech last year, Prime Minister Datuk Seri Najib Razak announced a 15% increase in gross development expenditure to RM48.5 billion this year from RM42.2 billion in 2014.

Based on data tracked on Bursa Malaysia, HLIB’s Low said RM17.9 billion worth of contracts were awarded to domestic contractors in 2014, up 16% from RM15.4 billion in 2013.

This year, Low expects domestic contracts to moderate to RM15 billion, before picking up again in 2016 once the MRT Line 2 kicks in.

“If you look at December 2014, the contracts awarded were RM5 billion, which accounted for 28% of the total contracts dished out. Our data show that there appears to be no indication of slowing down in job flows,” he said.

Independent market research firm Smith Zander International Sdn Bhd, in a Nov 13 report, expects the construction industry to “grow strongly” to RM173 billion in 2017, a 46% increase from RM118.1 billion in 2013. The forecast was based on the value of projects awarded at a compound annual growth rate of 10%.

Last year, the Kuala Lumpur Construction Index (KLCon) outperformed the FBM KLCI. It went up 5.5% to settle at 278.42 points on Dec 31, 2014, while the KLCI dropped 4.95% to end the year at 1761.25 points.

Last Friday, the KLCon was up 2.66 points or 0.96% to 279.03 points, while the KLCI closed at 1,732.44 points, up 4.38 points or 0.25%.

This article first appeared in The Edge Financial Daily, on January 12, 2015.