Firmer stand on fiscal consolidation and revival of GST. As we had hoped and expected, the Goods and Services Tax was announced in the 2014 Budget with ample preparation time before it kicks off on 1 April 2015 at a starting rate of 6%. To offset the ever increasing cost of living, the government dished out measures and a considerable amount of financial assistance to the lower and middle income households. At the same time, there were many measures to ensure that Malaysia stays on track to achieve a developed nation by 2020, not merely by achieving the threshold of US$15,000 per capita income, but also making sure infrastructure and policies are on par with other developed nations. On the government’s end, they are demonstrating political willingness to maintain fiscal sustainability while committed towards more transparency, reducing waste and leakages as well as tackling corruption.

Positive impact pre-GST. It may be unpopular for political reasons but based on countries that had introduced GST their stock market usually reacts positively before and occasionally after its implementation. With a fixed timeline for the GST, our research has shown that this will bring about a boost throughout the whole economy and the capital market. We will be seeing strong investment and consumption from the private sector, especially in the 2H14 and a final push in the 1Q15 after which we are expecting a moderation lasting 6-months to a year after the execution of the GST. This is reflected in the government’s higher GDP forecast of 5.0%-5.5% in 2014 which is in line with our projection. Visit Malaysia Year 2014 will also add boost to the tourism which already set to receive a rather big allocation. The timing couldn’t be more apt, as recovery in developed economies will fuel tourism even more and the positive effects is expected to spill over into 2015.

Inclusive of the middle-income. Unlike this year’s budget, which seemed to sideline the middle-income group, next year’s budget appears to be more favourable to those in that group. BR1M will also be available for those in the lower-middle income earners and tax relief for the middle income. A targeted subsidy scheme also means a fairer distribution of subsidy. Similarly, there are a lot of goodies for SMEs and the youth population, from tax deductions, to subsidies, grants and training schemes. Healthcare and education also received a considerable budget allocation to ease cost of living alongside affordable housing schemes.

Not soon enough. As delighted as we are with the GST, there is the possibility that implementing it in 2015 may be too late to achieve the fiscal deficit target of 3.0% of GDP by 2015. Perhaps to make up for this the government is banking on some harsh subsidy rationalization while hoping for a stronger economic growth in 2014. Sugar subsidy is the first to be hit, as the subsidy was completely removed the day after the budget announcement. We reckon electricity tariff hike will be next and even more petrol subsidy rationalization come 2014. The large cut in subsidy (-15.6%) along with sustained revenue growth may narrow the budget deficit to 3.5% of GDP in 2014. However, we project that the deficit would be slightly higher at 3.7% of GDP on anticipated decline in petroleum income tax and in spite of the subsidy rationalization. There is also the question on whether or not the government will be able to keep the debt to GDP below the 55% level, as it expect to reach 54.7% in 2014, a mere 0.3 percentage point short of breaching the ceiling even with a restructuring of their fiscal management.

Interest rates may rise in 2H14. The current Overnight Policy Rate (OPR) at 3.00% have proven to be supportive of the present economic climate, especially when there are uncertainties from abroad that keeping it at the current rate is imperative to retain investor confidence. Taking into account even better external recovery spilling over to further boost the domestic economy as well as raising general consumption and investment level ahead of GST implementation in 2015, we may see a possibility of a 25-50 basis-point hike in the later part of 2014 or early 2015.

Addressing property issues. Cognizant of the sharp increase in property prices affecting the lower income group, the government plans to build more affordable houses and raised real property gains tax (RPGT) as well as prohibiting Developer Interest Bearing Scheme. It is of little surprise that the government would take precautionary measures to prevent a property bubble from happening judging from lessons learnt in the recent global financial crisis. While we expect property investors who are largely speculators to feel the brunt of the hike in real property gains tax (RPGT), the impact on the overall property sector would likely be neutral as demand is expected to remain healthy going forward.

Source: Kenanga