Can Malaysia prop up sluggish spending with tax cuts?

The country is planning tax refunds equal to 2.6% of the GDP in Q3 2018.

Whilst Malaysia’s private consumption growth is expected to lose steam in 2019 at 5.5%, it is forecasted to remain strong and largely exempt from the country’s broader economic slowdown thanks to the tight labour market and the repayment of tax refunds, according to a report by Fitch Solutions.

The government announced its decision to pay out $8.99b (MYR37b) worth of tax refunds which is equivalent to 2.6% of the country’s annual gross domestic product (GDP) in Q3 2018 in the 2019 Budget. The one-off payment of GST and income tax refunds will largely be funded by a special dividend of $7.29b (MYR30b) provided by state oil company Petronas, the report revealed. The decision came as a result of accusations that the previous administration wrongfully withheld the refunds from its citizens.

Also read: Thailand's economy growth falls below consensus as trade war looms: Fitch Solutions

“We expect the tax refunds to boost disposable incomes and support private consumption in 2019 despite the government’s watering down of fuel subsidies and the Bantuan Sara Hidup cash handouts meant to help lower income Malaysians cope with their living costs,” Fitch Solutions explained.

Real private consumption growth was expected to slow as a result of consumers front-loading their purchases over a three-month long tax holiday between June and September 2018. "We maintain our view that private consumption growth will see a sharp correction in Q4 2018 whose effects will continue to be felt in Q1 and Q2 2019,” Fitch Solutions added.

Meanwhile, Malaysia’s unemployment rates are expected to remain stable over the medium-term, with rates hovering in the 3.1% level which is considered low by global standards, the report noted. The total number of employed individuals in Malaysia increased 2.4% YoY in October 2018, whilst unemployment levels fell 3.3%.

“Low unemployment will also see the tightening of the labour market which will support wage growth in Malaysia,” Fitch Solutions highlighted, with the Department of Statistics Malaysia predicting 8% and 6.5% YoY increases in wages in urban and rural areas, respectively. Starting from 1 January 2019, the minimum wage was raised to $267.25 (MYR1,100) from $242.95 (MYR1000) in Peninsular Malaysia and $242.95 (MYR920) in Sarawak and Sabah.

Also read: IT employers willing to shell out higher premiums to attract top talent: study

Additionally, inflation is forecasted to remain subdued in 2019, averaging 1.4% which is slightly higher compared to 2018’s 1%. This was attributed to slowing economic growth and high base prices in H1 2018.