MARC: Budget 2015 expected to address macro issues

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KUALA LUMPUR: Further fiscal consolidation efforts are needed to ease concerns of a possible downgrade in Malaysia’s sovereign rating, which has been maintained on a negative outlook by Fitch Ratings since July 2013, said Malaysian Rating Corp Bhd (MARC).

The local rating agency is expecting Budget 2015 to address the key issues of fiscal consolidation, economic growth and rising cost of living.

“At the same time, a respectable gross domestic product (GDP) growth momentum will be needed to offset other pressing macro issues such as mediocre revenue growth, the high government debt level and moderating momentum in private consumption,” its chief economist Nor Zahidi Alias (pic) said in a report “Pre-Budget 2015: Accelerating Growth, Ensuring Fiscal Sustainability and Prospering the Rakyat” released yesterday.

He said MARC is of the view that going forward, the government has to consider long-term plans to strengthen the resilience of the economy to withstand economic shocks. These include appropriate strategies to unwind the current cash handout programmes, measures to address contingent liabilities (debt guaranteed by the federal government) that have been rising in recent years, elevated government operating expenditure levels and high government debt, and to deal with the impact of a more liberalised capital market.

“Budget 2015 is likely to include measures to mitigate the effects of the goods and services tax (GST) on the cost of living. The initial impact of GST on inflation cannot be underestimated, with a spike in demand expected ahead of its implementation as well as a possible rise in profiteering activities,” said Nor Zahidi.

“Businesses will likely try to pass on the rise in costs to minimise the impact of GST on their profit margins, especially in the less competitive sectors. Even the prices of zero-rated items, which are in theory supposed to stay unchanged, may experience some upward pressure as businesses try to offset losses in other segments of goods and services,” he said.

The rating agency also expects the government will increase direct cash handouts (1Malaysia People’s Aid or BR1M) temporarily for one to two years to help the people deal with the expected inflationary effects of the GST.

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“The number of goods classified as zero-rated will also likely be increased. These include essential items which are considered necessities such as fruits and medical drugs.

“There is also a possibility that residential properties priced below RM400,000, which are currently on the GST-exempt list, will be classified as zero-rated. Such a measure is also meant to curb further escalation in house prices as developers may pass on the additional costs to consumers if these residential properties are maintained on the GST-exempt list in order to protect their profit margins,” said Nor Zahidi.

He also said more incentives should be provided to encourage greater participation in Private Retirement Scheme to ensure that Malaysians have sufficient savings for their golden years.

“We are also of the view that the government should [also] allocate funds to invest in investment-grade bonds that are rated A and below. A fund management unit can be set up to manage the fund and be monitored by government institutions with a proven track record such as Khazanah Nasional Bhd,” he said.

MARC also wishes to see more retail participation in the local bond market as most of the investors currently are big pension funds, insurance companies and financial institutions.

Nor Zahidi said that greater retail participation can be facilitated by lowering the entry requirements into the bond market such as net assets required and minimum lot size.

This article first appeared in The Edge Financial Daily, on October 9, 2014.