This article first appeared in The Edge Financial Daily on July 27, 2018

KUALA LUMPUR: Malaysia is expected to miss its fiscal deficit target of 2.8% for 2018. Instead, its deficit is likely to widen to 3.2% of gross domestic product (GDP) due to the shortfall in revenue from the zero-rating of the goods and services tax (GST), says UBS Investment Bank economist.

“The reason for the widening fiscal deficit is largely because of the zero-rated GST. The GST was an important revenue generator and the fact that it will not be collected (from June to August) will impact the government’s revenue this year,” UBS Investment Bank economist Alice Fulwood said during a conference call yesterday.

“But we are optimistic that the revenue lost would be recouped when the sales and services tax (SST) kicks in in September. So, it (the fiscal deficit target) will be a slight miss this year, but I don’t think it will trouble the rating agencies too much. I also think it will not impact the ringgit anymore,” she added.

With the scrapping of the GST, Fulwood said the latest inflation data revealed there was a lot of downward pressure on prices, which could give a boost to consumption in the near term.

Fulwood is confident that the new Pakatan Harapan government can reduce the country’s fiscal deficit to 2.8% next year as it makes greater headway in cutting wasteful spending.

Eventually, this could lead to a much more balanced budget in 2020, she added.

In the Economic Report 2018 released by the finance ministry on Oct 27, 2017, the previous administration had targeted the fiscal deficit to drop to 2.8% in 2018, from 3% in 2017.

Fulwood said UBS is maintaining Malaysia’s GDP growth forecast for 2018 at 5.4%, higher than Finance Minister Lim Guan Eng’s prediction of 5%.

“Malaysia’s economy is dynamic, open and deeply integrated into the global economy — this means rising trade tensions and the likely imposition of further tariffs are likely to slow growth in the short-term,” Fulwood said.

“But in the long term, Malaysia’s nimble economy stands as one of the economies that are relatively better-positioned to benefit from market share gains and to attract foreign direct investment as a result of Chinese companies expanding production overseas, when compared with other Asean economies,” she added.

Nevertheless, Fulwood said UBS is more optimistic about the country’s economic growth in the second and third quarters of this year.

“But heading into the fourth quarter, that’s when it will get worse as the country will witness the impact of the SST, as well as the US-China trade tension weighing on growth,” she added.

On Monday, the Statistics Department said the latest data from the country’s leading index had indicated Malaysia’s economic growth is likely to slow down in the next four to six months, between September and November.

Going into 2019, Fulwood said Malaysia’s GDP growth is expected to slow to 4.2% amid tighter fiscal policy.