The Impact Of GST It took 1 years from when the Goods and Services Tax (GST) was first mooted in Malaysia to its implementation on April 1,1. The move was announced at Budget 1 to replace the existing Sales and Services tax as the government was under pressure to rein in its persistent fiscal deficits which it has been running since the Asian Financial Crisis. The GST is one of the key strategies to help Malaysia achieve its target of a balanced budget by. In the upcoming Budget 1, the government is expected to follow up with more fiscal consolidation measures, in particular, to reform its fuel subsidy scheme. With the GST, we expect headline inflation rate to rise to % in 1 from our estimate of this year. As the impact is not expected to be sustained, we do not think Bank Negara Malaysia (BNM) will tighten monetary policy based on the GST consideration alone. The central bank has highlighted the accumulation of economic and financial imbalances in recent meetings that led to the bps Overnight Policy Rate (OPR) hike in July. As growth is likely to slow in 1, there is little basis to raise the OPR beyond its pre-lehman level. In addition to the announced cuts in personal and corporate income tax rates, offsetting packages will help to reduce the short-term impact of the GST on private consumption and business costs. Higher domestic interest rate is also a headwind to growth. Overall, the impact of GST implementation on economic outlook in 1 will be further mitigated by some frontloading in expenditure in the first quarter as well as a firm labour market. GST rate in Malaysia is lower than in most Asian countries. Based on revenue collection from the consumption taxes in other GST countries, there is potential improvements in Malaysia s fiscal position after its implementation. Revenue collected from the sales and services taxes only acccounted for 7.% of total central government revenue in 13, paling in comparison to the consumption tax revenue in the GST countries. Country Comparison Of GST Rates And Revenue From GST In Selected Asian Countries Year of Implementation Initial Standard Rate (%) Current Standard Rate (%) Consumption Tax Revenue (% of Govt Revenue)* Japan 1989 8. 1. Singapore 199 7. 1.1 Taiwan 198.. - Indonesia 198 1 1.3 Philipines 1988 1 1 1. Thailand 199 1 7. 3.3 Vietnam 1999 1 1 3.7 China 199 17. 17..3 Australia 1 1 1. South Korea 1977 1 1.7 India 1. 1. 13. Source: Royal Malaysian Customs Department, Ernst & Young 13, CEIC, * 13 or latest QUARTERLY GLOBAL OUTLOOK Q1 1
Comparing the average inflation rates in the countries before and after GST implementation or changes to the GST rates, it can be shown to have a short-term impact on CPI. Thailand was an anomaly as state-owned companies were asked to shoulder the GST impact in 199 and the sharp depreciation of THB during the Asian Financial Crisis brought up the inflation rate in 1998 despite the lowering of GST rate. Average 3-mth Inflation Before And 3.. 1... 3.1.7.7 1. 3. 1.1. 3% GST % GST % GST 7% GST 199 3 7 Average 3-mth Inflation Before And 3.. 1.. 1.1.7..1 1. 1989 1997 1 3. 3% GST 8% GST % GST Average 3-mth Inflation Before And 1 1 8...9. 8.3 9.9 Average 3-mth Inflation Before And 1% GST 7% GST 1% GST 199 1998 7... 3.1.1 QUARTERLY GLOBAL OUTLOOK Q1
Inflation rates revert to long-term averages in the years after GST implementation. In Japan and Thailand, the dip in the inflation rates after the GST rate change in 1997/98 could be partly attributed to economic downturn following the Asian Financial Crisis. 7 3 1 - -1 9 9 9 9 98 8 1 1-8 88 91 9 97 3 9 1 9. 8. 7... - - 8 87 89 91 93 9 97 99 1 3 7 9 11 13 9. 8. 7... Ave 1987-99 = 3.7% Ave -13 = % 87 9 93 9 99 8 11 QUARTERLY GLOBAL OUTLOOK Q1 3
Private consumption spending could be dampened after the GST. Short-term tightening in monetary policy could add further downward pressure to growth. 1 1 8 - - - 8 89 9 9 98 1 7 1 13-8 88 91 9 97 3 9 1 1 1 3 - -1 1-1 8 87 89 91 93 9 97 99 1 3 7 9 11 13 9 9 98 1 7 1 13 QUARTERLY GLOBAL OUTLOOK Q1
Headline inflation is expected to moderate back into its long-term average in the next few years. As inflationary impact is expected to be short-term, the central bank is unlikely to react aggressively with its monetary policy. We maintain our forecast for another bps rate hike in 1Q1 to bring the OPR back to pre-lehman level. Monetary policy continues to be centered on preventing a build-up in economic and financial imbalances. Malaysia: No Lasting Impact On Inflation BNM Has One More Rate Hike By 1Q1.. Malaysia Annual CPI (%) Ave 198-1 =.7% Post GST CPI Forecasts 1 8 CPI (y/y ) OPR (%) UOB forecasts inflation to peak below %y/y in 1-8 9 9 98 1 1F 18F - Jan- Dec-7 Nov-9 Oct-11 Sep-13 Aug-1 Expected frontloading of private consumption spending in 1Q1 and firm labour market will mitigate GST impact on in 1. But higher interest rates and high household debt will continue to pose headwinds to growth. Malaysia: Expected Slowdown In And Growth In 1 GST provides an avenue to diversify the government s revenue sources. Combined revenue contribution from sales and services tax was just 7.%, well below that of the petroleum taxes which raked in 13.9% of the total revenue in 13. Sources Of Central Government Revenue (%), 13 1. 1. -. -1-1. 9 9 98 1 7 1 13 1F Non revenue receipts, 1. Other indirect taxes, 1.3 Sales tax,.7 Service tax,.8 Excise duties,.7 Import duties, 1. Non tax,. Export duties,.9 Income taxes, Other direct taxes,. QUARTERLY GLOBAL OUTLOOK Q1