This article first appeared in The Edge Financial Daily on May 16, 2018
KUALA LUMPUR: The windfall from higher-than-budgeted oil prices will help plug the shortfall in government revenue for this year after the government abolishes the goods and services tax (GST), said RAM Rating Services Bhd.
Other ways to plug the revenue shortfall include bringing back the sales and services tax (SST) in some form, and the temporary cessation of some large government-linked projects while they are under review, said RAM. The government had previously projected RM44 billion in GST revenue for this year. However, following Pakatan Harapan’s victory in the May 9 general election, the GST is expected to be scrapped and the SST reintroduced.
“The timeline for the execution of these changes and their scope will determine how fiscal deficit management is followed through,” RAM said in a statement yesterday.
To maintain fiscal prudence, the credit rating agency said there are several avenues to rationalise expenditures, although the new government had yet to announce any concrete plans.
“The other aspect of the equation that we will be monitoring is new revenue-boosting measures that will also be required for fiscal consolidation to be sustained going forward,” RAM added. The agency said a number of Pakatan’s “10 promises for the first 100 days” are very supportive of private consumption activities, which can provide some potential upside to RAM’s current private consumption growth projection of 7.2% for 2018.
“The consumption boost will depend heavily on how fast current policies can be changed and new ones administered, such as the GST and the reintroduction of SST. The form this will take is another aspect to consider in terms of its scope in respect of government revenue and consumption boost,” RAM added.
RAM said inflation could come in lower than its projected 2.3% this year on a narrower indirect tax reach and the reintroduction of a targeted fuel subsidy mechanism.
“The extent of the downward pressure on prices will hinge once again on the policy details — the extent of subsidy support and at what level prices will be capped,” it added. As for the country’s overall economic growth, RAM said much of the downside risk will fall on investment momentum, seen to come from a slowdown in infrastructure investment implementation rates on the back of the government’s review of contracts with foreign participation, and from market uncertainties, which will dampen capacity-building activities in the near term.
“This will put some downward pressure on our private investment projection of 8% for this year, although we are still monitoring how expedient this process will be to get things back on track,” RAM said.
It added that the review and potential reopening of government contracts to another round of open tenders could have an extended dampening effect on projects in the pipeline. For 2018, RAM said it is keeping its forecast of the country’s economic growth at 5.2%.
“RAM views Malaysia’s sound macroeconomic fundamentals as a key driver of a sustainable growth momentum and a central factor underpinning its rating going forward,” the agency said.
RAM also said it is monitoring developments, especially from the newly established Council of Eminent Persons, expected to shape most of the economic reforms and maintain financial stability in the country’s historic power transition.
“The strong emphasis by the new leadership on governance and institutional reforms is a long-term positive for the nation’s fundamentals,” it added.