KUALA LUMPUR: The implementation of the goods and services tax (GST) came at a favourable time for Malaysia when inflation is likely to take off from a record low, according to Deutsche Bank.

In its Asia Economics Monthly report titled “Fading growth prospects” that was released yesterday, Deutsche Bank said inflation is likely to climb to about 1.5% in March after authorities raised fuel prices by at least 12.5% from February.

“We also think that the GST should bring inflation to at least 2% from April through year-end. On average, this year’s inflation is likely to fall comfortably at the lower end of the 2% tro 3% expectation of Bank Negara Malaysia (BNM),” it said in its report. As such, it projects that the central bank would keep rates steady this year.

It also said that introducing the GST this month would enable the government to meet its projected GST revenue of RM21.7 billion (from April to December) under the 2015 budget tabled last October.

“If last year’s sales and services tax revenues (RM17.2 billion) were to grow according to our nominal GDP growth forecast of about 6% (real GDP growth plus inflation) in 2015, revenue would amount to RM18.2 billion.

“This estimate thus implies that a 6% GST rate is seen to add an extra RM3.5 billion in its first year, which to us is attainable being on the conservative side,” it said.

It also believes the government will meet its fiscal deficit target this year, as it has in the past two years, though it noted that risks of a fiscal slippage abound.

It said potentially weaker domestic demand could hurt additional GST revenues, even as company registrants turned out higher than expected.

Hence, more fiscal reforms are necessary to sustainably reduce the deficit, such as rationalising natural gas subsidies and augmenting GST revenues, it said.

“Government spending, which is seen to be almost unchanged as last year’s under the revised budget, might also have to be increased slightly to support a slowing economy,” it added.

It also noted that declining export revenues and sluggish domestic demand due to the GST are likely to keep GDP growth below trend in the first half of this year.

“The second half may see a recovery but that would largely depend on some improvement in commodity prices and external demand. This weak outlook on exports, coupled with fairly resilient demand for imports, weighs on Malaysia’s current account surplus,“ it added.

The bank has a real GDP growth forecast of 4.5% and an inflation rate forecast of 2.3% for the country this year.

Meanwhile, across the region, Deutsche Bank said all major Asian economies had experienced exports contraction, necessitating a re-examination of growth outlook.  Along with trade and growth, inflation continues to be remarkably subdued, reflecting not just commodity price declines but also muted food price dynamics and soft demand, it said.

“It may be tempting to attribute ongoing developments as a result of a favourable oil price shock, but inflation had been trending down in many Asian economies long before the oil price correction came along.”

Deutsche Bank also noted weak demand in Asia was a risk toward deflation, as the slowdown in China, lacklustre trade, excess capacity in manufacturing, and rising regional leverage were among the key factors that have contributed to disappointing growth.

This article first appeared in The Edge Financial Daily, on April 17, 2015.