This article first appeared in The Edge Malaysia Weekly on September 3, 2018 - September 9, 2018

ONE would think the absence of a whopping RM35.44 billion — consisting of RM19.39 billion in Goods and Services Tax (GST) refunds and RM16.05 billion in excess income tax and Real Property Gains Tax yet to be refunded (and yet to be accounted for in government accounts) — would have a deleterious impact on Malaysia’s growth outlook.

However, economists say Malaysia’s economic fundamentals remain solid and the absence of those funds will not pose a significant risk to gross domestic product growth, at least for 2018 and 2019.

“The impact on the economy would unlikely be significant partly because the growth drivers — private consumption and exports — are still doing okay. Malaysian export data continues to show decent numbers and consumption could be strong, given the tax holiday,” Affin Hwang Capital Research chief economist and head of research Alan Tan tells The Edge.

According to the Department of Statistics, exports in June were valued at RM78.7 billion, up 7.6% year on year, amid growth in the export of electrical and electronic products, refined petroleum products and crude petroleum.

A potential concern, however, is whether the payment of the refunds would strain government expenditure in the near term, resulting in cutbacks on other items, such as development expenditure.

“The only potential drag is whether or not paying off the refunds would put some strain on government expenditure going forward. If there is a need for the government to cut back on development expenditure, the impact would be felt on the investment side,” Tan says.

On the other hand, external factors such as the impact of a full-blown trade war between the US and China, and the former’s tightening monetary policy, pose more of a risk to Malaysia’s economic growth, he adds.

“Assuming the US goes ahead in imposing huge tariffs on China and the latter retaliates, global trade will slow and Malaysia will be impacted. We are a very open economy after all, and still highly reliant on trade.”

In any event, his research outfit remains comfortable with its 5% GDP growth forecast for 2018 and 2019, provided the global economy continues to hold up and private consumption remains strong. Tan says the revenue generated from corporate and personal income taxes would partly cover the revenue loss from the abolishment of GST.

Moreover, the government will have other income streams, including the Sales and Services Tax (SST), which kicks in on Sept 1 and is projected to yield RM2 billion per month, as well as an increase in dividend payment from Petroliam Nasional Bhd of RM24 billion for 2018, RM5 billion more than initially proposed.

“There will be more income for the government and it will be interesting to see what measures and strategies it will announce in the upcoming Budget 2019 to generate revenue and optimise operating expenditure,” he adds.

Meanwhile, MIDF Research chief economist Dr Kamaruddin Mohd Nor says, “As far as we are concerned, we don’t think the missing money would have any material impact on the economy yet, pending further clarification from the government.”

Although the research house recently lowered its GDP growth forecast for the year to 5.2% from 5.5%, he says the unpaid tax refunds were not a factor, and attributes the cut to slower growth in the second quarter, which at 4.5% was the slowest in one-and-a-half years.

“We did not factor the unpaid funds into our GDP forecast but we are seeing a slowdown from what we first estimated. The 4.5% growth in the second quarter was a surprise as the median forecast was about 5.2%.”

The slowdown in the quarter was attributed to a moderation in industrial production, manufacturing sales, distributive trade and external trade.

However, he does not anticipate any serious obstacles to economic growth from the domestic side but is keeping a close eye on the US-China trade war.

“If it is prolonged, it will have implications on several things, including business confidence, investments and companies’ future expansion plans due to the uncertainty.”

He adds that the government’s revenue is expected to continue increasing until 2020, expanding by 6.4% in 2018, based on MIDF’s projected GDP growth of 5.2%.

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