KUALA LUMPUR, June 4 — Malaysia would likely enjoy lower inflation for the following two years with zero Goods and Services Tax (GST) collected over the next three months, but could possibly miss its targeted budget deficit of 2.8 per cent, a bank’s research report has said.
A Deutsche Bank macroeconomics report said its forecast of lower inflation is due partly to the reintroduction of fuel subsidies for the public by the Pakatan Harapan government, which it said is likely to reduce the Consumer Price Index (CPI) by 0.2 to 0.3 percentage point for both 2018 and 2019.
“As for inflation, we are revising our 2018 CPI forecast down to 1.9 per cent from 2.5 per cent and 2019 to 2.8 per cent from 3.1 per cent to take into account the impact of three policy decisions,” it said in a recent macroeconomics report on Malaysia.
The second policy is the change in GST rate of six per cent to zero from today onwards and the expected introduction of the Sales and Service Tax (SST) system in September, which the report said will likely reduce the CPI by a similar 0.2 to 0.3 percentage point.
“Finally, the Pakatan Harapan shadow budget suggests much tighter scrutiny of alcohol and tobacco under-declaration, which is likely to drive inflation higher under this heading,” it said of the third policy.
With the lower inflation forecasts, the Deutsche Bank macroeconomics research predicted that Bank Negara Malaysia will likely maintain the overnight policy rate (OPR) or interest rate at 3.25 per cent for the rest of this year, but said it expects an interest rate hike in the first half of 2019.
“This will take the OPR to its all-time high of 3.50 per cent, which we think will also be the top of this cycle,” it said.
Last Thursday, the Finance Ministry said it expects the federal government to still be able to meet its target of budget deficit at 2.8 per cent of the Gross Domestic Product (GDP), even after the expected RM17 billion in lost revenue with the shift of GST to SST.
The ministry last Thursday predicted it could keep its 2.8 per cent deficit target, through more money coming in from an estimated RM4 billion collection from SST this year, estimated higher dividends of RM5 billion from government-linked companies and estimated RM5.4 billion from higher tax income due to higher global oil prices.
The ministry had also predicted the government could save money to hit the 2.8 per cent target by reviewing, deferring or scrapping RM10 billion worth of projects.
But the Deutsche Bank macroeconomics research cast doubt on the ministry’s confidence in achieving its target, believing among other things that the GST-SST transition could cause a higher loss in government revenue and also predicting that the RM3 billion allocated for PH’s planned subsidies to maintain RON95 petrol and diesel prices will not be enough.
“Overall, we believe maintaining the fiscal deficit at the budgeted 2.8 per cent of GDP will be hard,” it said, expecting the budget deficit to be 3.1 per cent this year but said it is not high enough to trigger a full ratings downgrade.
The research report maintained its earlier forecasts of overall economic growth for Malaysia at 5.6 per cent for 2018 and 4.9 per cent for 2019.
Among other things, it said the expected increase in private consumption — due to the tax holiday and subsidies — is only expected to add slightly to economic growth, as those measures to boost spending are being rolled out at a period when the economy “has already been running well above potential”.
