KUALA LUMPUR (July 27): RAM Rating Services Bhd has upgraded the outlook of the retail sector to stable from negative, ahead of the implementation of the sales and services tax (SST) in September, which is expected to keep the sector in a highly competitive market.

"RAM expects the retail sector to be among the prime beneficiaries of the country's generally more upbeat consumer sentiment and the string of measures proposed by the new government to alleviate the rising cost of living," the rating agency said in a statement today.

Additionally, RAM said the rapidly evolving consumer preferences and the rise of e-commerce are becoming more of a threat, especially for traditional brick-and-mortar retailers.

Meanwhile, RAM's head of consumer and industrial ratings Kevin Lim expects the zero-rating of the unpopular goods and services tax (GST) for three months from June to August will translate into stronger consumer spending and sales for retailers.

"This view is also shared by Retail Group Malaysia, which had projected a stronger 5.3% rise in retail sales for 2018 from the earlier estimate of 4.7%," he added.

In some cases, RAM noted the government's move to zero-rate the GST may broaden the operating margins of businesses that have been absorbing GST since its implementation.

"Amid promotional campaigns, expansion of outlets and restraint in passing on higher costs to consumers, we can observe (from a sample of seven retailers) that average post-GST operating margins (for 3Q15 to 1Q16) had mostly narrowed year-on-year compared to the previous corresponding period," the rating firm added.

According to RAM, consumer sentiment has markedly improved since the 14th general election (GE14) on May 9, which saw the Pakatan Harapan government assuming power under the leadership of Prime Minister Tun Dr Mahathir Mohamad.

In addition, RAM said the latest survey by the Malaysian Institute of Economic Research has revealed that the consumer sentiment index (CSI) — a barometer of consumer confidence — had surged to a high of 132.9 points in 2Q18 from below 100 points for 15 consecutive quarters since 3Q14.

"The CSI hit a trough of 63.8 in 4Q15, subsequent to the implementation of the goods and services tax on April 1, 2015," RAM said.

In addition, the rating firm said the latest RAM Business Confidence Index also suggested that firms are more upbeat on their business outlook for 3Q18 and 4Q18, with both the corporate and small and medium enterprise segments displaying higher overall indices after the conclusion of the GE14.

Post GE14, RAM said the overall index for corporates and SME segments rose to 57.3 and 53.4, as compared to 56.6 and 51.4 during the pre-GE14 period.

Meanwhile, once the government rolls out the SST in September, RAM said it expects consumer spending and retail sales to "normalise somewhat".

"However, the overall tax burden on consumers will be considerably lighter, with the government's tax collection estimated to come in at RM21 billion per annum, i.e. less than half of the amount collected through the GST," Lim added.

In addition, RAM has also praised the government's wide-ranging pledges and initiatives to increase the purchasing power of consumers, particularly the lower-income bottom 40% households earning less than RM3,500 per month.

Since assuming power, the Pakatan Harapan government has announced several other measures to ease the burden of the rakyat, which include the reintroduction of a targeted fuel subsidy, as well as a medical subsidy, reduced excise duty on first-car purchases, the gradual abolition of expressway tolls and a higher minimum wage.

"While details are scant and execution will take time, these moves are deemed positive for the retail sector," it added.

With the upcoming reintroduction of the SST, RAM said it anticipates some upside in the sales and operating performances of retailers under its coverage, such as AEON Co (M) Bhd (AA2/Stable/P1), F&N Holdings Bhd (AA1/Stable/P1), Mydin Mohamed Holdings Bhd (issue rating: AAA(fg)/Stable) and Poh Kong Holdings Bhd (issue ratings: AAA(fg)/Stable/P1).

"The more favourable operating landscape is expected to provide some much-needed respite to these players, which have been affected by persistently weak consumer sentiment in recent years," Lim said.