By Chan Quan Min
Indications are the Malaysian economy will grow at a slower pace after speeding along at above 6% during the first nine months of the year. Events that could have an impact on economic expansion in 2015 are the introduction of GST from April 1, 2015 and plunging crude oil prices.
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Economic growth is a barometer of stock market performance and expectations for slowing economic growth are sure to make for more cautious investors in the coming year.
The year 2014 was defined by two unimaginable national disasters on the world stage and closer to home, political upheaval in Malaysia’s wealthiest and most populous state of Selangor. Despite the turmoil, the Malaysian economy grew at incredible speed, outpacing many of its neighbours in the wider Asia-Pacific region.
In the nine months up to September this year, gross domestic product or GDP expanded at an annualised rate of 6.1%. Much of the growth came from domestic demand in the form of private consumption or investment.
The last time growth rates were consistently this high was four years ago in 2010. But what goes up must certainly go down.
GDP growth is widely thought to have peaked in the first half of the year and is now chugging along at a slightly slower rate that is closer to the long run average of about for the Malaysian economy.
The more modest growth rates are expected to persist well into 2015. Official estimates by Bank Negara put GDP growth for 2015 at between 5% and 6% and point to “moderating trends”.
Signs of slowing growth appeared in latest data for the third quarter. GDP growth in the three months to September was noticeably affected by “weaker investment and exports”, according to a recent report by investment bank Kenanga.
Citing “growing uncertainty on the growth trajectory in the United States, Eurozone, China and Japan” and “the effect of the goods and services tax (GST)”, the investment bank expects a more moderate expansion in GDP of 5.1% in 2015. This is on the low end of Bank Negara estimates.
On monetary policy, most economists do not foresee a change in interest rate policy in the near term. This is despite signs pointing to most major East Asian central banks turning dovish in a low interest rate environment created by low oil prices.
China led the fray in late November by cutting both its lending and borrowing rates by 25 basis points. The Eurozone has begun a form of quantitative easing (QE) that will inject more money into the financial system of the customs and trading bloc which has been set back by years of lacklustre growth.
Whether Malaysia will follow suit and loosen monetary policy is unclear. Malaysia is unique from its neighbours as it is the sole oil exporter among major Asia-Pacific economies.
GST from April 1, 2015
Malaysia’s first ever goods and services tax or GST will come into effect from the first day of April next year. Projections by the Ministry of Finance estimate that the introduction of the consumption tax will add at least one percentage point to the prevailing inflation rate.
Bank Negara does not have a specific figure for how higher prices for most goods and services following GST implementation will impact economic growth but expects a growth slowdown for at least two quarters after GST comes into effect.
While the GST will replace the sales tax and service tax, it is not a one-to-one replacement. GST will collect more in taxes than its predecessor as it is being introduced at a rate higher than the revenue-neutral rate. The standard-rate for GST is 6%, with provisions for a zero-rate and exemptions for essential goods and services.
Other countries that have introduced GST in similar conditions saw inflation rates spike during the first few months following the implementation of the tax. A brief slowdown in economic growth was recorded in Australia following the implementation of the tax there in 2000.
A more recent example, an increase this year in Japan’s consumption tax of three percentage points very quickly put a halt to the country’s nascent economic growth under Abenomics. It was the first time the rate of consumption tax was changed in 17 years.
Crude oil at US$60
The past four months have seen crude oil prices drop by about a quarter. Brent crude, the most commonly used benchmark, was trading at about US$110 a barrel in June but has since fallen to about US$60 a barrel.
Malaysia is a net oil and gas exporter and has traditionally been dependent on petroleum-derived income. About 32% of federal government revenue comes from either royalties, petroleum taxes and Petronas dividends.
Low oil prices are a double-edged sword. On one hand, lower oil prices mean less in government funds are paid out in subsidies. This effect is immediate.
Beginning this month, petrol and diesel are no longer subsidised after transitioning to a management float system. The move, made as the true price of subsidised petrol and diesel fell to below the government mandated price, will mean savings of about RM12 billion allocated to fuel subsidies in the 2015 budget.
On the other hand, persistently low oil prices could mean smaller dividends from the state petroleum company Petronas. This effect is not immediate and does not manifest unless oil prices stay low for more than just several months.
Shamsul Azhar Abas
Petronas CEO Shamsul Azhar Abbas has signalled a possible cut in Petronas dividends paid to the government. If he follows through with his suggestion, it could jeopardise Prime Minister Najib Abdul Razak’s goal to trim the budget deficit to 3% by the end of 2015. Senior Finance Ministry officials are apparently preventing Shamsul from making those cuts.
The revenue side of the government’s 2015 budget from lower crude oil prices is challenging to predict. An average crude oil price of US$105 per barrel has been used to calculate the federal budget for next year. Far lower oil prices than assumed would make necessary a relook at the numbers.
In any case, experts predict the oversupply issues that have caused a rout in oil prices to persist until the second half of next year. For now, oil returning to above US$100 a barrel looks a distance possibility.
Capital flight?
The recovery of the US economy and the mere mention of interest rate hikes by the Federal Reserve is, depending on who you ask, enough to start a huge selloff in emerging markets. However, the actual situation is likely to be more complex.
This was the year of QE tapering, short for the Fed’s gradual reduction in the amount of bond purchasing suing conjured up cash under its QE programme. QE is an aggressive form of monetary policy that central banks resort to in order to pump more liquidity into an economy after interest rates have been taken down to zero.
Janet Yellen
November marked the end of six years of QE in the US, with trillions made in bond purchases. Despite Fed governor Janet Yellen going on record to say short-term interest will be kept at near zero for a “considerable time”, some market commentators feel this is to be taken with a pinch of salt. She later said the Fed would be “patient” instead, which seemed to suggest that the length of time interest rates would be kept low would now be somewhat shorter.
Doomsayers fear a repeat of the “taper tantrum” of mid-2013 if better conditions in the US result in repatriation of capital currently located in emerging markets.
Optimists say such theories paint all emerging markets with a broad brush. It is thought that investments in emerging markets with good fundamentals are far more likely to stay put than investments made hastily.
Doomsayers have the upper hand now as the FTSE Bursa Malaysia trades at and around 1,700 points, a nine-month low. According to reports, more foreign funds are pulling out than coming into the country.
Tomorrow: Oil & gas stocks going for a bargain
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