KUCHING: RAM Rating Services Bhd (RAM) projects a base-case inflation of 3.8 per cent to four per cent for 2015 – compared to the 3.5 per cent headline inflation expected this year – on the basis of the Goods and Services Tax (GST).
The ratings agency said its assessment of the direction of fiscal and monetary policies points to at least another round of fuel-price increases and electricity-tariff adjustments – as well as a further 25-basis points (bp) lifting of the Overnight Policy Rate (OPR) to 3.50 per cent – to anchor inflationary expectations before the implementation of the GST in second quarter of 2015 (2Q15).
“Given such upward price pressures, consumers’ purchasing power will be susceptible to some weakness in 2015,” it added in its statement yesterday. “However, several factors will still help shore it up to a more moderate growth for private consumption next year, as opposed to an overall sharp decline.”
All said, RAM expects private consumption to decelerate in the first two quarters post-implementation, before picking up again in 4Q15.
As such, private-consumption growth is envisaged to average five per cent compared to the 6.8 per cent increase expected for 2014.
“We expect favourable demographics and labour-market conditions to continue supporting fundamental demand.
“That said, the growth of private consumption will be moderated by higher interest rates and the most recent macro-prudential measures, which will lead to a managed moderation in household credit growth,” it opined.
Wage growth is expected to remain on trend and differentiated by industry.
It would therefore be difficult to forecast at this point whether average wage growth will sufficiently cover the general increase in prices.
However, it does maintain that additional adjustments may only manifest later in the year, and will vary by industry.
Nevertheless, the effects of wage-determined purchasing power would be the most significant dampener of private consumption.
Meanwhile, there will be some relief from the reduction in personal income-tax rates for certain brackets effective next year.
Specifically, the widening of the higher tax brackets will help reduce the tax burden on the middle-income earners, who are most likely to feel the ‘price squeeze’ given their spending patterns but do not qualify for the government’s BR1M financial aid.
The continued evolution to a more targeted form of BR1M assistance is expected to support private consumption among the low- and lower-middle-income groups in 2015.
Moreover, the method of disbursement and the Government’s targeted approach will be an integral development as this will have a bearing on the sustainability of consumption throughout the year.
From an operational standpoint, companies’ pricing decisions will be mostly unaffected as GST compliance will be cost-neutral, provided they deal in standard-rated or zero-rated supplies.
Such suppliers’ selling prices are not expected to be revised upwards when GST kicks off; instead, they are envisaged to remain attentive to the strength of the underlying demand.
Elsewhere, companies involved in residential property and private healthcare face different circumstances, as they provide goods and services that are currently deemed tax-exempt supplies.
“Some initial feedback received indicate that firms within this category have started reviewing their pricing strategies to manage the additional costs, given their inability to claim input taxes due to the supply classification. The extent of the costs that can be passed through is still uncertain at this stage,” said RAM Ratings.
Notably, GST covers a broader range of goods and services than the current sales and services tax (SST).
As a result, the prices of some goods that are currently not taxed may trend upwards. Conversely, the prices of some goods may fall due to the lower GST rate of six per cent as opposed to the existing SST of 10 per cent.
However, these are still hypotheses, RAM said, adding that ultimately, pricing decisions will be chiefly influenced by companies’ business strategies and the resilience of consumer demand.
“That said, GST implementation remains a work-in-progress on all fronts. Yet, it is also a game-changer in many respects vis-à-vis fiscal sustainability, domestic demand and business operations.
“Although some economy-wide adjustments may be required so as to be aligned with the new equilibrium, the ‘new’ should be an improvement over the ‘old’ – with time.”