2015 is going to be tough – here’s 3 major reasons why

(Last Updated On: 01/11/2016)

GST – comes 1 April

To gauge realistically its impact, look at Japan’s experience in early 2014, when it increased its sales tax for the first time in 17 years.

The Japanese government had little choice – with its national debt at eye-watering level (2x the size of its entire economy) – desperate situation calls for desperate measures. With the need to fund social welfare programs for an ageing population – this is one of the way to boot revenue.

But just as it did in 1997 – the last time Japanese government attempted a similar move, raising consumption tax (aka GST or VAT) when the country plunged into recession, the exact same thing has occurred.

6 months after it increased its sales tax from 5% to 8%, Japan is officially in recession.

Malaysia, not unlike Japan, is also in debt but not so severe. GST is introduced to widen the tax base and reduce dependency on Petronas.

How will this impact the man on the street? Unknown yet – since no local benchmark.

Japan knew the potentially devastating effects of increasing its sales tax. That’s why Japanese legislation, which allowed for a 2nd consumption tax increase in Oct 2015, also included a provision that would allow for exactly the kind of delay which the Japanese government has triggered. Hence, the aggresive U-turn on a 2nd increase.

It is common sense that any kind of tax, drives inflation at a faster pace than wage hike. Consumption will slow – and for an economy which depends on domestic private consumption (Properties! Cars! iPads! Smartphones!), this is clearly not good news.

All scans below from the book – Uncle’s Guide to GST by Choong Kwai Fatt

GST on exempt supply

GST on medical malaysia GST on financial services GST on properties

Falling oil prices

The Saudi’s Mexican Standoff with the Americans over oil means for Asia, a net oil importer, is largely a beneficiary of a depressed oil market. But according to Bank of America Merrill Lynch Asean Economist Chua Hak Bin, Malaysia is THE exception.

Unlike South Korea, Thailand or the Philippines, Malaysia is the only lone loser. How so?

Malaysia, thanks to Petronas, is a net oil exporter, and even though our export surplus has been dwindling, our fiscal position remains highly sensitive to oil prices.

Consider this – A huge portion – 30% of our fiscal revenue is oil-related, whether from petroleum-derived income taxes or oil royalties to the government. With oil increasingly more difficult to find and therefore more expensive to produce, Petronas has been cutting dividends to the government in recent years.

At 4 year lows,it is little surprise that the oil taiko, Petronas, is re accessing its RM 300 bil capex programs, which officially runs to 2017.

Fuel on managed float

The third, but no least – this move is seen more as an aggressive reforms to hike fuel prices and reduce those crippling subsidies on RON95 petrol and diesel. It is a no-brainer move

On a wider basis, however, the necessity for the government to stick its fiscal deficit targets of 3.0% in 2015, given the foreign ownership of government debt and the attendant fiscal responsibility required.

But will these moves be enough to stop the capital outflows attracted by a resurgent US economy?

The dollar is now at 7 year high against the Yen, and appreciating strongly against most Asian and emerging market currencies. MIDF Research is highlighting at the significant outflows from our capital markets.

So there you have it – for most – all these akin to being a stationary target, with 3 poisoned arrows flying towards us.

What will be your action plan for this year? What are the things we can control or cannot control?

3arrows

Adapted from Focus Malaysia column – Onwards and Upwards by Khoo Hsu Chuang

This Post Has 2 Comments

  1. Hi Janet, hedging against diff currency is normally making sense if you have children studying there. it is a risk mgmt strategy and is never a proper “investing” property. As for REIT, it is always a good thing for consistent cash flow 🙂 Hope that helps

  2. Happy New Year…..and I remain hopeful for 2015. My immediate concern is protecting my Ringgit. Wondering whether investing in Singapore REITs will be a good thing……dividend and currency appreciation vs Ringgit?

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