KUALA LUMPUR: Malaysia is likely to widen its fiscal deficit to 3.2 per cent of gross domestic product (GDP) in 2018, missing target to narrow it to 2.8 per cent in 2018, said UBS economist Alice Fulwood.
This would be a result of the zero-rating and subsequently imminent abolishment of the Goods and Services Tax (GST).
Fulwood, however, said the shortfall would be offset by the rolling out of the Sales and Service Tax (SST) in September, and that it would not affect Malaysia’s sovereign ratings.
She said the value added tax was an important revenue generator and the fact that it would not be collected will impact the government’s revenue.
“We are optimistic that the loss in the revenue, which will be offset with the rolling out of the SST in September, will be recouped. And that they (Pakatan Harapan government) can bring the fiscal deficit down to 2.8 per cent of the GDP by 2019.
“So it will be a slight miss this year, and I do not think it will trouble the ratings agency too much and impact the ringgit anymore. It (fiscal deficit) will widen this year, but could come back next year if the government makes more headway cutting expenditures,” she told reporters during a telephone conference yesterday.
Meanwhile, Fulwood said despite signs of economic slowdown, UBS had kept Malaysia’s GDP growth forecast at 5.4 per cent in 2018.
She said the rising trade tension between the US and China, and the likely imposition of further tariffs, were likely to slow growth in Malaysia in the short-term, due to its dynamic and open economy as well as the fact that it is deeply integrated into the global economy.
She said in the long-term, Malaysia's nimble economy stood out as one of the economies that were relatively better positioned to benefit from market share gains and attract foreign direct investment (FDI).
Chinese companies would be expanding production overseas more to Malaysia than other Asean economies, as a potential result of the US-China trade tension, she added.
“By looking at the countries’ exports overlap with those of China into the US, Malaysia is one of the best-positioned exporters to gain large market share in the event that tariffs make Chinese exports less competitive.
“Malaysia’s ability to trade at China’s expense is due to the largely similar export products such as electronics, when compared to China. Thus, Malaysia is positioned to be a potentially strong substitute exporter to the US. The sector most likely to see these gains are electronics exporters,” she said.