KUALA LUMPUR: RAM Rating Services Bhd projects base-case inflation of 3.8% to 4.0% for 2015 compared to the 3.5% headline inflation expected this year.
It said on Tuesday its assessment of the direction of fiscal and monetary policies pointed to at least another round of fuel-price increases and electricity-tariff adjustments, as well as a further 25-bp lifting of the Overnight Policy Rate (OPR) to 3.50%.
The ratings agency said the policies would be to anchor inflationary expectations before the implementation of the Goods and Services Tax (GST) in 2Q 2015.
“Given such upward price pressures, consumers’ purchasing power will be susceptible to some weakness in 2015. 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, we expect private consumption to decelerate in the first 2 quarters (after 2 preceding quarters of front-loaded consumption) post-implementation, before picking up again in 4Q 2015.
“As such, private-consumption growth is envisaged to average 5.0% compared to the 6.8% increase expected for 2014,” RAM Ratings said.
The ratings agency said 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 6% as opposed to the existing SST of 10%.
“However, these are still hypotheses. Ultimately, pricing decisions will be chiefly influenced by companies’ business strategies and the resilience of consumer demand.
“Although – structurally - supply chains are not expected to change significantly, companies along the supply chain may do so according to their relative cost-competitiveness because GST on inputs are only claimable if firms source their input from GST-compliant suppliers.
“As a result, some smaller players (which do not fall within the prescribed revenue bracket for GST compliance) may opt to voluntarily register to remain competitive,” it said.
RAM Ratings said however, there are still unknown factors that will only become clearer with time. These may significantly influence RAM’s macro projections and include the Government’s plans for subsidy rationalisation, the extent of wage flexibility amid rising cost pressures, the future structure of BR1M assistance, compliance levels and the governance structure to ensure proper adherence by GST registrants, which will help address the risk of profiteering opportunities.
“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,” it said.
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