• Election pledges to add RM4.9bn to fiscal deficit but well under 3% of GDP

• RM1trn debt raises concerns, but still manageable given the country’s strong economic growth

• Economic fundamentals remain solid; 2018 GDP growth forecast of 5.4% maintained

Impact of Pakatan Harapan (PH) government’s fiscal reforms

As stated in our previous report dated 14 May 2018, we had expected the replacement of the Goods and Services Tax (GST) with the Sales and Services Tax (SST) to result in a net revenue deficit of RM8.9bn, on the assumption of SST collection beginning in July 2018 after the first parliament sitting on 25 June 2018.

However, the Prime Minister has announced that the SST will be re-introduced in September 2018 instead, resulting in a lower estimated revenue of RM6bn from RM12bn and increasing net revenue deficit from GST abolishment to RM14.9bn.

The introduction of the Skim Peduli Sihat and targeted fuel subsidy will cost the government an additional RM6.0bn and RM3.0bn respectively. (see Table 1).

Oil-related revenue will likely come in higher in 2018 compared to the estimated RM33.5bn in Budget 2018. Assuming an average Brent crude oil price of USD70 per barrel in 2018, we forecast an additional RM10.0bn in oil- related revenue this year relative to a more conservative Brent crude oil price assumption of USD52 per barrel in Budget 2018.

The PH government may also gain RM5bn higher dividends from Petronas, Bank Negara and other government-linked companies (GLCs). For example, Petronas paid RM16bn in 2017 (2017 Brent crude oil avg: USD54.7 per barrel) compared to RM27bn in 2013 (2013 Brent crude oil avg: USD108.7 per barrel). Therefore, Petronas will likely pay higher dividend this year.

Netting the revenue gain, higher costs arising from GST’s removal and other election pledges will add an estimated RM9.9bn to the budget.

However, “price stickiness” or “price rigidity” due to businesses’ reluctance to reduce prices may undermine the new government’s efforts to ease cost of living. Strict government enforcement is required to ensure that both consumers and businesses benefit from the abolishment of GST.

Additional cost-saving measures

More emphasis is needed on reducing or eliminating unnecessary public expenditure to plug the country’s fiscal holes. Cost savings will most probably come from (1) improved efficiencies from divestment and reforms in Government-Linked Corporations (GLCs); and (2) trimming of the Prime Minister’s Office (PMO) budget allocation, from closures and streamlining of several agencies.

Source: Alliance Research - 30 May 2018