- GDP growth of 5.5% in 2015. The Malaysian economy had registered a healthy expansion as at YTD 3Q14, though at a moderated pace as compared to the same period a year ago. Notwithstanding the external headwinds, we expect a full-year growth of 5.5% in 2015 vs. our growth estimate of 5.7% for 2014. We envisage output growth to be backed by the continued surplus through trade while domestic demand is expected to taper in 2015.

- Indirect taxes to bolster government revenue in 2015. Indirect taxes are expected to bolster government revenue in 2015 owing to the introduction of GST in April next year. Total indirect taxes – including export and import taxes, excise duties, sales and services taxes, GST and others – will generate RM47.7bil in revenue for 2015 (or +23.6% YoY). Note that GST alone is expected to contribute RM21.7bil to total revenue. Having said that, lower-than-expected global oil prices could put a strain on government coffers in 2015.

- Broader revenue base and lesser dependence on petro-dollar revenue. A track record of sound budget management and implementation will be integral to Fitch’s future assessment of Malaysia’s debt ratings. We note that the proposed implementation of GST in 2015 could strengthen Malaysia’s credit profile on the back of a broader revenue base and lesser dependence on petro-dollar revenue. Also, the government assures that it will maintain operating surplus at all times and ensure that federal government debt remains below the national threshold of 55%. Aside from that, the government has abolished the fuel subsidies effective 1 December.

- Accommodative monetary policy. The current monetary policy is sufficient to provide important support to economic growth in a stable price environment. Inflation would escalate and could rise to 4.2% next year as the government introduces GST effective April 2015. As of YTD October, prices have risen by 3.2% YoY. Given the new retail petrol pump prices for December, we expect overall inflation to register a growth of 2.7% YoY during the month. For November, inflation is expected to advance by 2.9% YoY.

- Relatively weaker Ringgit for most parts of 2015. The gradual removal of the QE in the US has triggered the outflow of foreign funds from Malaysia in 2H14. Ringgit had depreciated in 4Q14 and will likely remain suppressed for most parts of 2015. Meanwhile, further downside risk for the Ringgit is likely should the US Fed decide to raise interest rate next year. Note that the Greenback strengthened against major currencies in recent months. At the close of 28 November, the Bloomberg US Dollar Index stood at 1,106.9 points or +2.4% from end-October.

Source: AmeSecurities