Premature to judge

THE new government has demonstrated its commitment on their main election promise and replaced the goods and services tax (GST) with the sales and services tax (SST).

The re-implementation of SST would less likely raise domestic price pressures as feared by certain quarters. The Ministry of Finance also promised prices would drop, as SST covers 38% of the Consumer Price Index (CPI) basket of goods versus around 60% under GST.

Stabilisation of pump prices was a major change post GE14, thus resulting in lower inflationary pressures. Pump prices of RON95 and diesel were fixed at RM2.20 and RM2.18 per litre respectively since May 9.

In May, Brent crude oil prices reached its highest level of US$79.8 per barrel before hovering around the average level of US$75.4 per barrel in June and July.

Fortunately, the stabilisation of pump prices post GE14 has helped prevent the cost of living of the rakyat to increase further.

Based on our estimates, at an average Brent crude oil price of US$75.4 per barrel, the price of RON95 will likely be priced at RM2.54 per litre (9.1% higher than the prevailing fixed price of RM2.20 per litre).

Meanwhile, as an initial step towards restructuring the National Higher Education Fund Corporation (PTPTN), the government removed the names of about 433,000 PTPTN loan defaulters from the no-travel blacklist as of end-June 2018.

However, the planned move to defer study loan repayments for borrowers earning less than RM4,000 a month needs to be studied further and thus has been delayed for now.

Nevertheless, the government has to first address the issue of rising number of unem- ployed fresh graduates. In 2017, total unemployed persons with at least a diploma or degree made up 27.3% of total unemployed persons. This represents a rising concern as the total number of unemployed graduates has rose significantly from just 5.5% in 2011.

Although the promise of increasing the minimum wage to RM1,500 nationwide has been decided in principle by the Cabinet, Prime Minister Tun Dr Mahathir has guided that the implementation would only be done on a gradual basis with due consideration being given to productivity growth. This is so that the rakyat can enjoy better living standards without the adverse impact of high inflation.

i-Suri

In fact, labour productivity has been growing steadily at an average annual growth of 3.6% from RM75,634 in 2015 to RM81,268 in 2017, above the 2010-2015 average annual labour productivity growth of 1.9%.

Meanwhile, as promised, the Suri Incentive Programme (i-Suri) kicked off with the first phase coming into effect on Aug 15, with 359,065 women registered in the e-Kasih programme. The second and third phase of this scheme will be implemented in early-2019 and early-2020 respectively.

According to the Department of Statistics, the labour force participation rate of women was at 55.3% of the total working women population (between ages 15 to 64) in 2Q18, which was significantly lower than the labour force participation rate of men at 80.5% during the same quarter.

Therefore, through the implementation of i-Suri, almost half of the women population above the age of 21 in Malaysia that are married and most likely not working will still be aided and given a safety net when they pass the retirement age of 60.

This will help provide a better standard of living and help ease their financial burdens after the retirement age.

Addressing the debt issue, the government has also taken initiatives to review and prioritise mega projects that will incur huge fiscal spending in the long run.

It has postponed the High Speed Rail which has an estimated cost of RM60bil, the Mass Rapid Transit 3 project worth around RM40bil-45bil, as well as reviewing the East Coast Rail Link and two gas pipeline projects (Multi Product Pipeline and Trans-Sabah Gas Pipeline) which could lead to savings of more than RM90bil.

Although the government has decided to proceed with the Light Rail Transit Line 3 project, the cost has been significantly reduced to RM16.6bil, from RM31.65bil previously.

Lace of funding

To-date, promises such as the Skim Peduli Sihat, abolishment of tolls, implementation of targeted petrol subsidies, corporate and personal income tax cuts, and 50% discount for Felda settlers’ debts have been put on hold for now due to lack of funding.

However, the Economic Affairs Minister has guided that the government will still go ahead with the implementation of people-centric and more focused projects such as the construction of new infrastructure and the enhancement of current infrastructure (hospitals, schools, water and power supply, highways and bridges).

Although the government is currently making efforts in fulfilling its promises, the ringgit has suffered a minor knee-jerk reaction following the implementations of various fiscal reformations that has likely caused some tremor among foreign investors after the surprise electoral results in GE14 on May 9.

As of mid-August, the ringgit is currently trading at RM4.09 per US dollar, after depreciating by 1.7% year-to-date. We expect the ringgit to hit RM4.10 per US dollar by end-2018, partly due to domestic jitters arising from the country’s RM1 trillion debt issue, the deferment of some pledges that were supposed to be implemented within the 100-day timeframe, as well as external risks due to escalating trade tensions.

In fact, political and policy uncertainties due to the transition from the old to new government, and external risks such as the US-China trade tensions have contributed towards the recent upsetting 2Q18 GDP growth of 4.5% when compared to the 5.4% growth in the previous quarter.

However, with indicators such as the Consumer Sentiment Index and Business Conditions Index soaring up to 132.9 and 116.3 respectively, the overall sentiment seems to have improved on the back of the actions taken by the new government in addressing the country’s debt issues and carrying out its fiscal reforms.

The ringgit will likely rebound to around RM3.80 per US dollar by mid-2019, as the new government demonstrates more clarity and efforts in trimming the national debt level of RM1 trillion and fulfilling more of its election promises.

In July 2018, foreign investors have turned net buyers of Malaysian Government Securities at RM3.5bil, while the KLCI index registered a 5.5% gain to claw back its yearto-date losses due to political uncertainties that cropped up during and after the GE14 in 2Q18. As such, the confidence of foreign investors in the Malaysian economy which plummeted in the wake of the opposition’s surprise election victory, is now on the mend.