Pro-rakyat, inflation unavoidable, says AllianceDBS Research

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Below is an excerpt from an AllianceDBS Research report released tonight

The government forecasts 2015 GDP growth to rise between 5.0% and 6.0%, led by the major sectors of services and manufacturing, including the construction sector.   

Aggregate domestic consumption is anticipated to grow at a slower pace of 6.2% in 2015, with slowing private consumption from inflationary headwinds due recent cost-push measures.

Private investment spending is forecasted to remain robust at 10.7% in 2015 (2014e: 12%) in view of on-going big ticket projects such as the Mass Rapid Transit (MRT), Light Rail Transit (LRT) line extension and RAPID.    

In the Budget 2015, the government will proceed with its fiscal consolidation commitment through revenue enhancement and on-going subsidy rationalisation. 

Meanwhile, individual income tax collection is expected to decline, mainly due to the 1% to 3% reduction in personal income tax rate effective from 2015.  

Although the first year of GST revenue is estimated to bring in RM23.2 billion, net GST revenue collection only come in at RM690 million - forgone revenue from the Sales Tax and Service Tax (SST) of RM13.8 billion; RM3.8 billion in tax exemptions; and RM4.9 billion in BRIM payments.   

Meanwhile, the government will continue to post a deficit for the 18th consecutive year, with 2015 deficit amounting to RM35.7 billion – equivalent to 3% of GDP.  Debt to GDP ratio is expected to be reduced to 52%, from an estimated 54% in 2014.  

Our View: No major surprises, forecast numbers look reasonable.  

We maintain our cautious view on the current account surplus due to risk of a sooner than expected trade deficit. We think that the falling global crude oil prices and the implementation of a multi-tiered income based petrol subsidy mechanism can substantially reduce fuel subsidies expenditure.   

We forecast a GDP growth of 5.8% in 2014 and 5.2% in 2015 with a moderate growth in domestic consumption. 

Domestic private consumption is challenged by cost-push inflation on the back of recent subsidy rationalisation and impending GST implementation.   

Inflation will remain elevated in 2014-15, on account of inflationary impact from subsidy rationalisation and implementation of GST. Therefore, we project full-year estimate at 3.5% in 2015 and forecast 4% in 2015.  

We expect the Overnight Policy Rate (OPR) at the current rate of 3.25% to stay put until year-end which we believe is still accommodative to growth.