AFTER forming the new government, Pakatan Harapan will continue ahead as planned with its promises to the people.
As guided in the Pakatan’s manifesto, there are 10 initiatives that it promised to implement within 100 days after the formation of the new government.
Removal of GST
The introduction of 6% goods and services tax (GST) in 2015 will be replaced by the re-introduction of the sales and services tax (SST). Pakatan expects the abolition of the GST will immediately ease the burden of the people.
Given the challenging task involve in this reform, we expect the measures to come in by July 1. The removal of the GST for six months to 2018 budget will forego around RM21.9bil on federal government revenue.
Meanwhile, we estimate that the SST will likely to amount to RM20bil in 2018, given the economic growth over past few years. Assuming this, SST revenue collection into federal government cofers is estimated at RM10bil.
As the government has already promised to implement it within 100 days, we reckon the policymakers could immediately adjust GST to zero-rated for all goods and allow individuals and firms to enjoy the benefit until a long-term solution is studied and implemented.
Reviving fuel subsidies for targeted groups
Pakatan plans to implement a targeted fuel subsidy at a monthly fixed quota for users of motorcycles below 125cc and cars below 1,300cc, who are mainly the B40 income group.
Based on our calculations, the subsidy will likely cost the government around RM3bil if it is to subsidise pump prices from RM2.20 per litre to RM1.80 per litre, depending on the quota determined.
Meanwhile, oil-related revenue will likely come in higher this year compared with the estimated RM33.5bil in 2017, given the higher Brent crude oil prices now. Therefore, the government could use the additional oil-related revenue to fund this subsidy.
Therefore, assuming that Brent crude oil is to average at US$70 per barrel for the full-year 2018, it could translate into roughly an additional RM6.4bil in oil-related revenue from the conservative Brent crude oil price assumption of US$50 by the previous government in Budget 2018.
Ringgit short-term outlook
In Pakatan’s manifesto, it stated that the government would provide Bank Negara the full authority to develop a strategy to return the ringgit to its actual potential value within three years, but further details are yet to be discussed.
We expect the ringgit to depreciate in the immediate term, recording RM4 per US dollar by end-June, before gradually recovering and stabilising at RM3.90 per US dollar by end-2018.
Overall impact of fiscal deficit reforms
Overall, the implementation of the SST to replace the GST will likely result in a net revenue deficit of RM11.9bil. Additionally, the introduction of targeted fuel subsidies and Skim Peduli Sihat will cost the government an additional RM3bil and RM6bil, respectively.
Nevertheless, the estimated extra oil-related revenue of RM6.4bil will slightly reduce the deficit to a net loss of RM14.5bil.
Using the estimated real GDP under Budget 2018, the fiscal deficit is expected to remain unchanged at 3% from a targeted 2.8% of total GDP (2017 estimate: 3%), after factoring in the additional net deficit loss from new reformations and initiatives.
Since the mega projects that will be re-evaluated by Pakatan are long-term projects, there will not be any immediate effect on Malaysia’s 2018 GDP growth. Thus, we reiterate our 2018 GDP growth forecast of 5.4% (2017: +5.9%).