KUALA LUMPUR (Dec 14): Despite the robust growth of the country's economy, domestic-oriented businesses in Malaysia may still be dragged by local headwinds in 2018, said RHB Research.

The research house said in a note today that the factors include income tax collection, reduced public spending, deepening slowdown in housing and non-residential construction activity, and rising cost of doing business.

It opined that the recent tax audit and investigations carried out by the Malaysian government have turned businesses "cautious".

Having collected RM43.1 billion in the first nine months of 2017, the government would need to collect another RM24.7 billion in the fourth quarter to hit its target of RM67.8 billion in total collections for 2017 — up 6.6% from 2016, said RHB Research.

"The amount represents more than half it collected in 9M17. We believe that if the government is able to achieve its collection in 4Q17, it could drain a substantial amount of cash from companies," it said.

"Consequently, companies would likely turn cautious and keep more cash in hand, resulting in a slowdown of economic activities," it added.

Meanwhile, public spending cut by the government to control budget deficit "posed a drag" to domestic demand, said RHB Research.

Also putting downward pressure is rising cost of doing business — with reasons ranging from rising wages and fuel prices to clampdown on illegal workers — which caused "domestic-oriented players to be less upbeat about the strong economic recovery", it added.

On a related matter, RHB Research said presently, local players are less upbeat on the robust economic growth indications.

It pointed to disparity between Malaysia's 6.2% gross domestic product (GDP) growth in the third quarter, mixed retail sales data in the quarter and subdued street sentiment towards the state of the Malaysian economy.

The research house conceded that it is "hard to explain" the stark contrast between weak retail sales data published by Retail Group Malaysia (RGM) for the third quarter, and the numbers released by the Statistics Department which showed double-digit growth in the quarter.
 
RGM tabulates retail industry data on behalf of the Malaysia Retailers Association. For the third quarter, RGM said retail sales contracted 1.1% on-year, against 12.2% published by the Statistics Department.

The research house conceded that RGM's sample size is smaller than that of its peers in the public sector.

It explained that one possibility is that Malaysia's economic growth recovery is very much export-driven. "Although construction only accounts for a 4.5% weightage in GDP, it is mainly domestic driven and it has a linkage to more than 100 industries in the country.

"Still, there was a spillover from the export sector into domestic-oriented industries, albeit with a [lag] and the impact was less significant," it said.

Exports strengthened to 10.4% y-o-y in real terms in the first nine months of 2017 — a sharp improvement from a meagre 0.8% rise recorded in the previous corresponding quarter, it said, adding that it has translated to higher income domestically.

Combined with other government policies — including minimum wage revision, Employees Provident Fund contribution and 1Malaysia People's Aid (BR1M) — private consumption grew 7% on-year during the nine months, it added.

"The strong growth in private consumption was consistent with the retail trade figure published by the Statistics Department," it said.

"However, we found it is hard to explain the robust private consumption and the department's strong retail trade numbers as opposed to RGM's sluggish retail sales."

"However, we believe whatever reasons that affected the RGM big retail players' performances, the non-RGM retailers would unlikely be spared," it added.