Analysts see moderate GDP growth ahead
KOTA KINABALU: Analysts see moderate gross domestic product (GDP) growth ahead after weighing in the possible downside risks which comes with the transition of administration to the new Pakatan Harapan (PH) government.
Of note, on Thursday, Bank Negara Malaysia (BNM) announced that Malaysia’s economy grew by 5.4 per cent in the first quarter of 2018 (1Q18) while on a quarter-on-quarter (qo-q) basis, Malaysia’s GDP grew 1.4 per cent, as compared with one per cent in 4Q17.
Malaysia’s GDP generally grew below consensus’ expectation of 5.6 per cent.
In it Economic Viewpoint report, Kenanga Investment Bank Bhd’s research arm (Kenanga Research) remarked: “As the change in government will likely put a damper on private investment due to policy uncertainty and disrupt public spending we see downside risks to our GDP forecast going forward.”
However, the upside to growth could possibly be derive from higher private consumption following the government’s decision to scrap the Goods and Services Tax (setting its rate at zero on June 1) and take its time to implement the sales and services tax, it highlighted.
“External factors may also weigh on growth mainly the expectation that exports would continue to slow on the back of the slowing global demand for consumer electronics especially mobile devices,” it added.
Hence, the research team revised its 2018 GDP forecast to 5.1 per cent from 5.5 per cent (5.9 per cent in 2017.
“Nonetheless, there could be offsetting factors if the government takes an aggressive approach to review major infrastructure projects.
“It then can prioritise or strategically delay projects that have high import content as it did in the 1990s. Less import could help boost net exports and support GDP growth,” Kenanga Research opined.
Meanwhile, Maybank Investment Bank Bhd’s research arm (Maybank IB Research) maintained its 5.3 per cent real GDP growth forecast.
However, it adjusted the components of growth to take into account of 1Q18 numbers and the expected economic impact of PH Government implementing its first 100-day promises in the election manifesto.
“On the supply side, we raised the forecast for services growth (to 6.6 per cent from 5.9 per cent); cut the growth projections for manufacturing to (5.1 per cent from 5.8 per cent), agriculture (to three per cent from 3.8 per cent); and construction to (4.5 per cent from seven per cent); while maintaining mining growth (1.3 per cent).
“On the demand side, we upgraded consumer spending growth (to 7.3 per cent from 6.5 per cent), but downgraded growth for Government consumption (to one per cent from +5.8 per cent), investment (to 3.1 per cent from 6.6 per cent) as well as exports to (4.3 per cent from 4.9 per cent) and imports (to 2.5 per cent from 5.7 per cent).
“Consequently, domestic demand, which makes up slightly over 90 per cent of GDP, is revised downward (to 5.2 per cent from 6.4 per cent), offsetting the upward revision in net external demand growth (to 19.5 per cent from negative 2.2 per cent),” it said, noting that it would further revise its growth forecast as more details on PH Government’s economic policies come into place.
In particular, Maybank IB Research pointed out that there is a need to cover the government’s funding gap following Prime Minister Tun Dr Mahathir’s zero per cent GST rate effective June 1, 2018.
In addition, it highlighted that the prime minister said that current levels of fuel prices would stay despite the rise in crude oil price, indicating the de-facto implementation of fuel price stabilisation via subsidy.
The research team stressed that there could be revenue loss from the zero-rating GST.
“Under Budget 2018, this year’s expected GST revenue is RM43.8 billion. The zero-rated GST implies GST revenue shortfall of RM25.6 billion on a simple prorated basis, equivalent to a 1.8 per cent of GDP deterioration in budget deficit which is targeted to be at 2.8 per cent of GDP this year under Budget 2018.
“A key immediate mitigating factor is the upside to oil-related revenue forecast of RM37.7 billion in Budget 2018 amid rising crude oil price,” it said.
It noted that Budget 2018’s crude oil price assumption is USD52/ bbl (Brent) against year-to-date average of US$69 per bbl.
“We estimated that every US$10/bbl rise in annual average crude oil price will boost oilrelated revenue by RM7 billion to RM8 billion,” it projected.
However, it pointed out that the net increase in oil-related income is tempered somewhat by ‘fuel subsidies/fuel price stabilisation’ mechanism that has actually been in place since late-March 2018.
“This is validated by the observation that retail fuel prices of RON97, RON95 and diesel have not changed since March 22, 2018 despite the 16 per cent rise in Brent crude since then up to May 17, 2018, indicating fuel prices are being subsidised,” it added.
Maybank IB Research also noted that further mitigation from the zero-rated GST should come with the eventual reintroduction of the Sales and Services Taxes (SST) which previously earned the Government RM17.2 billion on a full year basis.