‘Malaysia likely to miss fiscal deficit target’
> Wider gap of 3.2% of GDP this year expected due to revenue losses on transition to SST, says UBS economist
PETALING JAYA: Malaysia is likely to see a fiscal deficit of 3.2% of gross domestic product (GDP) this year due to revenue losses as a result of the transition from the Good and Services Tax (GST) to Sales and Services Tax (SST).
UBS Investment BankAsian Economics Team’s Alice Fulwood said in a conference call yesterday that it is more feasible to hit the 2.8% fiscal deficit target next year after the implementation of SST, prudent government spending and curbs on wasteful expenditure.
On a positive note, she said cancellation of the GST is likely to mean lower inflation, which is expected to average 1.2% and 1.7% in 2018 and 2019, respectively.
The CPI expanded below 1% to 0.8% in June, the lowest in the past three years, while the first-half inflation rate stood at only 1.6%.
Malaysia’s GDP growth is projected to remain strong at 5.4% for 2018, but could weaken temporarily in 2019 to 4.2% due to tighter fiscal policy and escalating trade tensions abroad, according to Fulwood.
The trade tensions may also exert pressure on the ringgit, which is projected to weaken to RM4.10 against the greenback by year-end and further weaken to RM4.20 by the end of next year.
Despite a potential slowdown as a result of the trade spat between the US and China, Fulwood noted that it could spell well for Malaysia in terms of gaining market share and making local exports more attractive and competitive in the global market as Chinese exports become less attractive after the 10% tariffs imposed on US$200 billion (RM810 billion) worth of Chinese goods.
In addition to that, she said, this could prompt Chinese companies which do not want to lose their US customer base to relocate outside of China, for which Malaysia is seen as a destination of interest for Chinese corporates.
“Many Chinese companies will want to keep producing goods to sell to American consumers, as such over time they might relocate production to outside China to other exporting and manufacturing hubs in Southeast Asia,” she said.
“China is a popular target for US corporate leaders’ investment intentions but our latest Evidence Lab data suggests some deterioration in the number of US companies intending to invest in China over the last year.
“This might imply an increasing willingness to invest elsewhere, especially in Asean, which is becoming incrementally more popular,” she added.
Fullwood also said ratifying trade agreements such as the Comprehensive and Progressive Agreement for TransPacific Partnership and the Regional Comprehensive Economic Partnership could spell well for Malaysia, which she said could be one of the countries to benefit the most, although the benefits are expected to set in the medium-term and lift growth in 2020.
“(It will) certainly send the right message to other trading countries that Malaysia is still open to business and looking to export more,” she added.