Stronger oil prices could spell lower GST — Analysts

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The government had made its intention sky-clear that the GST implementation last year was to broaden its tax base and continue with its fiscal consolidation plan. — Bernama photo

The government had made its intention sky-clear that the GST implementation last year was to broaden its tax base and continue with its fiscal consolidation plan. — Bernama photo

KUCHING: Analysts brought forward the possibility of a reduction in the Goods and Services Tax (GST) should oil prices continue to move higher and if the current consolidation level could be maintained.

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) highlighted that there is a possibility of oil  averaging around US$55 per barrel (pb) next year.

“It is plausible for the government to reduce GST rate by one per cent if the current fiscal consolidation level continues,” it put forward in a note yesterday.

“If the oil price average at US$75pb, GST could be further reduced to four per cent while maintaining the current fiscal consolidation target.

“The government had made its intention sky-clear that the GST implementation last year was to broaden its tax base and continue with its fiscal consolidation plan.

“The move, though unpopular, manages to mitigate the shortage in federal revenue due to the rout in global oil prices starting mid-2014 and received global affirmation from international rating agencies such as Moody’s and Fitch.”

The house estimated that should oil prices average at US$55pb in FY17, the government could reduce GST rate by one per cent bringing the rate to five per cent (currently at six per cent).

“At US$75pb, another one per cent could be shelved while maintaining the current fiscal consolidation target,” the research team opined.

MIDF Research further pointed out that the fiscal policy should be counter-cyclical rather than focused on the debt level.

“Despite debates among economists on the needs of government intervention in the economy, we opine that fiscal consolidation had the same effect as a contractionary policy.

“With the current economic environment – particularly with the weaknesses in global trade activity, we believe that an expansionary fiscal policy should be employed in order to support domestic economy in the short term,” it commented.

Overall, the research team believe that a reduction in the GST rate could boost higher private consumption.

“According to Bank Negara Malaysia (BNM)’s estimate, on average GST contributed 0.7 percentage points to inflation level while our own estimate was higher at 1.1 percentage points.

“Although we are not expecting significant reduction in the price level if GST is being reduced, we believe the inflation level could be suppressed, hence helping to boost private consumption.

“Note that the global economic condition is not doing well right now, and a boost in private consumption via lower GST should help Malaysia economy,” it said.

On the movement of oil prices, MIDF Research noted that for the fist half of 2016 (1H16), Brent oil price averaged at US$39pb, US$4pb higher than the US$35pb oil price scenario imputed in the 2016 recalibrated budget.

“Year-to-date, oil prices rose by 40.8 per cent to reach a 2016 high of USD52.5. If the price momentum continues, higher oil price should therefore translate into higher oil related revenues to Malaysia.

“Besides, at higher price, Petronas should be able to churn higher dividend, contributing more to the nation’s coffer.

“For FY16, the national oil conglomerate is expected to contribute RM16 billion in dividends, the lowest in more than a decade,” it said.

In order to match the forecast, the research team noted that oil prices need to hold the current price for the rest of the year.

“This is highly plausible given that oil has been on the uptrend since hitting rock bottom earlier this year. The most recent spike in oil prices was largely attributed to the declining dollar after Fed chairman, Janet Yellen hinted on no exact timing on future rate hike following a disappointing May job report.

“Nevertheless, we believe the upside is limited due to the current dynamics of global demand and supply. While demand continues to see tepid growth, major oil producers have been improving their operating efficiency, bringing down their breakeven cost production level.

“Thus, more supply is expected to enter the market especially at higher prices,” it said.