CGSI Research said the negative impact of SST 3.0 on GDP growth this year should be modest due to support from wage reform and cash assistance.
PETALING JAYA: The upcoming expansion of the sales and services tax (SST), slated to take effect on July 1, is unlikely to derail Malaysia’s economic growth, although it may trigger a short-term spike in consumer prices, analysts say.
Supportive domestic policies and targeted implementation are expected to cushion the broader impact of the expanded SST.
According to CGS International Research (CGSI Research), while the broader SST coverage is set to affect luxury goods and non-essential services –particularly those consumed by foreigners – it is designed to avoid burdening the average household.
“Based on our estimation, we deduced that the SST expansion could add 10 to 20 basis points (bps) to Malaysia’s annual consumer price index (CPI) this year,” the research house said in a note.
“In terms of trajectory, we expect a short-term spike in prices where the CPI could rise by 0.5% month-on-month in July and 2.2% year-on-year (y-o-y) compared with 1.8% y-o-y in June, before peaking in September at around 2.4% y-o-y,” the research house said.
Nevertheless, CGSI Research maintained its full-year CPI forecast at 2% y-o-y, citing weaker global commodity prices as a mitigating factor.
“We anticipate the prices of commodities such as oil and palm oil will continue to remain weak, which could provide a buffer against any potential price pressure ahead,” it said.
The expansion of the tax, dubbed SST 3.0, follows the earlier SST 2.0 revision last year, which had minimal effect on economic growth.
This time, the government has widened the tax base to cover more luxury items and services equivalent to 12.9% of gross domestic product (GDP), while increasing sales tax rates on 64% of listed products.
“We think the negative impact of SST 3.0 on GDP growth this year should be modest due to support from wage reform and cash assistance,” CGSI Research highlighted.
“The expansion of the SST has been specifically curated to target high-income earners so that private consumption is unlikely to be negatively affected,” it pointed out.
On monetary policy, CGSI Research said it believes Bank Negara would likely stay cautious, but eventually ease interest rates.
“We think Bank Negara will likely maintain a dovish stance, and expect a 25 sbps cut on overnight policy rate to 2.75% this year,” it said.
