This article first appeared in The Edge Malaysia Weekly on May 21, 2018 - May 27, 2018

IT has been more than a week since the Pakatan Harapan (PH) coalition trounced long-ruling Barisan Nasional at the polls. Since then, the new government has moved rapidly to fulfil the promises in its election manifesto.

One of their first policy changes were to zero-rate the Goods and Services Tax (GST) effective June 1 and keep the fuel price constant. The government is expected to announce its decision on tolls this week.

These changes, along with the promises to review mega infrastructure projects and improve public sector efficiency, have raised the question: Can we achieve the rather optimistic gross domestic product (GDP) growth forecast of 5.5% to 6% this year?

Notably, Bloomberg data shows that economists’ GDP forecast this year averages 5.4%. The majority of local economists had earlier estimated 2018 GDP to come in either at the lower end or below the official numbers, ranging from 5% to 5.5%.

The economists are keeping to their GDP estimates, pending the changes in policies under the new government.

Bank Negara Malaysia is also holding on to the original estimates but says it will assess the impact of all the initiatives once they have been announced by the new government. “Most of the initiatives are being discussed right now and once we have got them, we will definitely assess them. If there is a need to change the GDP forecast, we will announce it together with the Ministry of Finance,” said Bank Negara governor Tan Sri Muhammad Ibrahim at last week’s press briefing on the GDP’s performance in 1Q2018.

Malaysia’s GDP grew 5.4% year on year in 1Q2018, below the consensus estimate of 5.6% and also slower than the 5.9% growth seen in 4Q2017. The weaker growth was attributed to slower private investments and government consumption that offset the higher contribution from net exports.

Nevertheless, the central bank expects growth to remain favourable in 2018, with domestic demand continuing to be the key driver of growth.

While most economists are reluctant to make any revision to their forecast until policies are set in stone, they concur that one upside amid the changes will be an increase in private consumption this year, given the measures to ease the high cost of living.

Maybank Investment Bank Research has upgraded its consumer spending growth forecast to 7.3% from 6.5% previously to reflect the anticipated stronger purchasing power derived from the PH government’s pledges to remove GST and reintroduce sales and services tax (SST), stabilise the fuel price, defer repayment of student loans as well as equalise and raise the minimum wage within 100 days of being in office.

Socio-economic Research Centre (SERC) executive director Lee Heng Guie opines that the net impact of replacing GST with SST will provide relief to households as the former is a broad-based consumption tax.

But whether it will help to alleviate cost of living will depend on the individual’s lifestyle and spending habits, he adds. “Cost of living issues must be tackled from both the cost-related (supply and pricing) and demand (income-enhancing measures). The regulators and enforcement agencies must step up supervision and price surveillance and check on unfair trade practices.

This also entails a closer examination of the whole supply chain and distribution channels to track how the process flows in terms of price structure, cost and, ultimately, the supply and demand dynamics,” he says.

Meanwhile, Hong Leong Investment Bank Research says if consumer sentiment improves substantially, private consumption could rise to as high as 8% y-o-y as consumers release pent-up demand, thus lifting GDP growth for the year despite a reduction in government spending.

While private consumption could likely see an increase this year, economists say there is a downside risk ahead in terms of private investment and public spending.

“As the change in government will likely put a damper on private investment due to policy uncertainty and disruption of public spending, we see downside risks to our GDP forecast going forward,” says Kenanga Research in a report.

Maybank IB Research, which has maintained its GDP forecast at 5.3% for the year but raised its forecast of consumer spending growth, has trimmed public consumption expenditure growth to 1% from 5.8% previously, amid implications of the new government’s 100-day promises on government revenue and expenditure.

“There is a need to cover the government’s funding gap following the announcement on May 16 that the GST rate will be cut to 0% effective June 1 from the current 6%. In addition, the prime minister has also said that the current level of fuel price will stay despite the rise in crude oil price, indicating the de-facto implementation of fuel price stabilisation via subsidies,” says Maybank IB.

That said, without more certain direction in the policies, it is anyone’s guess whether private consumption will be able to make up for the potential shortfall in government spending and private investment.

Policy changes that have been announced so far will have the effect of reducing government revenue and some have raised the question of whether it would come at the cost of a larger fiscal deficit this year.

International rating agencies have said that the move to zero-rate GST would put constraints on government income if no revenue-raising measures were introduced.

“Moody’s views plans to abolish GST, if implemented without adjusting measures, as credit negative. While revenue losses this year will be offset to some degree by higher oil prices, this development is unlikely to be a structural — or act as a permanent — substitute for GST itself.

“The extent to which offsetting measures, if any, will help recover the revenue loss from GST will allow us to determine the exact impact on Malaysia’s fiscal position going forward. However, if GST is eliminated, it would increase the government’s reliance on oil-related revenue and would also narrow the tax base,” says Moody’s Investors Service senior analyst Anushka Shah.

UOB Research estimates that the shortfall in the fiscal balance this year could be about RM6 billion, or 0.4% of GDP, taking into account the removal of GST and the return of fuel subsidies, which will be offset by the reintroduction of SST, higher oil revenue and savings from the rationalisation of government expenditure.

Even more disturbingly, Prime Minister Tun Dr Mahathir Mohamad has said that there are many flaws in the figures given on the country’s financial position, which makes one wonder whether the fiscal deficit is actually wider than expected.

But at this juncture, it is be debatable whether fiscal deficit reduction should take priority over the institutional reforms and structural changes that the new government is looking to put in place for better sustainable growth in the long run.

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