Sunday, November 4th, 2018
PETALING JAYA: While Budget 2019, the first under the Pakatan Harapan government, has delivered a clearer policy direction that reinforces foreign investors' confidence, the higher fiscal deficit is a threat to Malaysia's sovereign credit ratings, say analysts.
Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew told SunBiz that the rating agencies are always “very mindful” of the deficit position, when Malaysia is grappling with big financial constraints with expenses growing rapidly than revenue expansion.
“Over the past 10 years, expenses have grown 9.4% per annum, which is about three times the 3.4% revenue growth.”
Sunway University Business School's Professor of Economics Dr Yeah Kim Leng said the the immediate concern is that high fiscal deficit may have negative implications on the market.
“The government is adopting a 'soft approach' in fiscal consolidation, some investors may react negatively to it.”
Malaysia's fiscal deficit is estimated to rise to 3.7% this year, significantly higher than the initial estimate of 2.8% due to the previously unbudgeted items such as RM1 billion interest servicing cost for 1Malaysia Development (1MDB) debts and RM3.9 billion goods and services tax (GST) refunds, among others. However, a gradual reduction could be seen at 3.4%, 3% and 2.8% for 2019, 2020 and 2021, respectively.
Yeah said though high fiscal deficit is a negative, it is likely to be offset by sustained economic growth of close to 5% in 2019 as well as fiscal management to reduce the debt level.
Saying that deficit is just one metric in determining a country's credit profile, he noted that the enhancement of spending efficiency, reduction of consumption and leakages will add to the growth momentum.
UOB Bank senior economist Julia Goh sees high fiscal deficit targets as a temporary diversion and does not steer away from the path of fiscal consolidation.
“As for Malaysia's sovereign ratings risks, we view the risks to be quite balanced. Positive ratings factors including efforts to restore public finances, improve transparency and governance standards. However negative factors are the higher headline fiscal trajectory, execution risks and revenue uncertainties.”
Pong believes foreign investors are convinced by the changes and reforms that the government has undertaken to address the weaknesses.
“I think the effort to reduce fiscal deficit will be well received by foreign investors, particularly when more investors are moving out from China to the Southeast Asian markets, including Malaysia due to trade war tensions.”
Calling it “unusual circumstances”, Pong said the RM30 billion special dividend from Petroliam Nasional Bhd (Petronas) should not jeopardise the oil major's expansion plans, especially exploration projects.
Yeah believes the special dividend from Petronas is premised on high oil price without posing any risk to it, but it shows that the government is still dependent on oil revenue. Having said that, the positive part is more innovative measures have been introduced to enhance the government coffers albeit raising a small amount of money.
Meanwhile, Moody's Investors Service's vice-president/senior analyst of sovereign risk group Anushka Shah said new tax revenues and spending cuts may place the country back on the path of fiscal consolidation over the medium term, and improved transparency and a focus on inclusive growth will be credit positive if sustained over time.
“However, in the near term, wider deficits and a heightened reliance on volatile oil-related revenues, including through Petronas dividends, will weaken the fiscal profile.”
PETALING JAYA: The measures announced in Budget 2019 will not be enough to “kick-start” the already subdued property and housing market, said property experts.
“The measures for the property sector are too small to affect the market in any way. The market is already subdued, already slow. Overall, I don't think there will be any impact at all as the changes are rather minimal,” said Malaysian Institute of Estate Agents past president Siva Shanker.
He said some of the policies such as the increases in the Real Property Gains Tax (RPGT) and stamp duty rates are unpopular but believes that Malaysians understand that the new government should be given a chance to fix the problems left behind by the previous government.
Siva said the increase in stamp duty for properties above RM1 million from 3% to 4% will not worsen the overhang as the majority of such units are within the RM500,000 to RM1 million price range.
“The majority of overhang units are in this price range and most of them are in the speculative market. The higher RPGT rate would also get rid of speculation and false demand in the market,” he told SunBiz.
On measures announced for first-time home buyers, he said any kind of concession is useful as many first- time home buyers are from the bottom 40% (B40) group, who may be able to afford monthly repayments but face difficulty in coming up with the downpayment.
“Any kind of savings is useful for them,” he added.
Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia past president Datuk Siders Sittampalam said Budget 2019 could have included some initiatives to kick-start the property market.
“I thought the RPGT would be reduced to boost the property market but, instead, the rate will be increased. This will have an impact on property investors. It will discourage those who buy for investment, which will result in a drop in rental properties as fewer people will buy for renting out.
“Foreign property investors will also be discouraged as the RPGT will be increased from 5% to 10%,” he said.
On the developers' commitment to reduce house prices by 10%, he said there is no visibility to ensure that they actually reduce prices.
“How will the government ensure that there is a 10% reduction in house prices? If the developer says his selling price has been reduced by 10%, the buyer would just have to accept it. It is not visible,” Siders said.
“However, I must acknowledge that the government has done quite a bit for the affordable housing segment. These moves will help. There are also other good ideas such as the property crowdfunding platform, but it is too soon to comment as the details are not out yet,” he added.
PETALING JAYA: The government's intention to set up an airport real estate investment trust (REIT), a first in the world, is a good start in the “securitisation” of government assets, said Area Management Sdn Bhd chairman Datuk Stewart LaBrooy.
“It's an interesting concept … putting government assets to work. Finance Minister Lim Guan Eng is on the right track to 'securitise' government assets and bring the money into the coffers of the government,” he told SunBiz.
In the Budget 2019 announcement, Lim said to privatise infrastructure assets, the government intends to set up the world's first airport REIT. The investors of the airport REIT will receive income arising from user fees collected from Malaysia Airports Holdings Bhd (MAHB), which has the concession to operate these airports.
LaBrooy, who is also Malaysian REIT Managers Association secretary, said it is still early days for the airport REIT, and that more details would need to be fleshed out, including who will be managing the REIT and how is the REIT going to be listed.
“When nothing has been done before, no one knows if it's going to work or not, whether the appetite for the assets is there. But airports are a prized asset and airport is a growing business globally. Getting a piece of the action is always a good idea,” said LaBrooy.
He pointed out that Australia's Macquarie Group had previously launched an infrastructure fund for airports, instead of a REIT.
A check on Macquarie Infrastructure and Real Assets' (MIRA) website, dubbed the world's largest infrastructure asset manager, showed that it previously managed the Macquarie Airports and the Macquarie Airports Reset Exchange Securities Trust. However these two funds are no longer associated with MIRA or Macquarie Group.
CBRE-WTW managing director Foo Gee Jen said the establishment of an airport REIT reflects a monetisation exercise whereby the government is anticipating RM4 billion in revenue through sale of 30% share in the REIT.
Apart from that, the government would also be relieved from expenditure incurred on airport operation and maintenance.
“Having said that, this has to be handled with care as unlike other assets, airport is a strategic asset that embodies the elements of sovereignty and security of a country,” said Foo.
PropertyGuru Malaysia country manager Sheldon Fernandez said the airport REIT is interesting and, as a global first, it offers an exciting new model to unlock the value of aviation assets going forward.
Another industry player said REIT is a good asset investment and that the airport REIT is a good initiative that can work.
“Airport is a real estate, it has stable income and is a good investment,” said the industry player.
The government hopes to raise RM4 billion from selling a 30% stake of the REIT to private investing institutions, while these investors will gain an invaluable opportunity to invest in top quality infrastructure assets. This REIT exercise will only be carried out after the new regulated asset base and user fees structure has been negotiated and finalised.
Going forward, the airport REIT will have the opportunity to raise funds publicly either by issuing new REIT units or via borrowings in order to fund the improvement and expansion of airports, especially those facing over-capacity.
This financial structure will significantly reduce the debt burden of the government to fund all of these projects on its own, while maintaining MAHB as an asset light operator not bogged down by heavy capital investments and debt.
Lim said other projects could also benefit from similar funding and investment structures, such as hospitals, or rail infrastructure.
PETALING JAYA: Labuan International Business Finance Centre (IBFC) is expected to lose its attractiveness after Finance Minister Lim Guan Eng announced that Malaysian companies transacting with companies based in the financial centre will only be limited to a 3% tax deduction on allowable expenditure.
“It will badly affect Labuan. Because all the leasing companies based in Labuan will now only get a 3% tax deduction on spending. About 70% companies using the Labuan structure are Malaysian companies and it will effectively close down the Labuan route for Malaysian resident companies,” Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai told SunBiz.
Labuan will see restructuring in tax treatment and new conditions come to force on transactions involving entities from the offshore and mid-shore centre as well as abolishment of current conditions.
From Jan 1, 2019 Malaysian companies which transact with a Labuan entity is entitled to tax deduction on expenditure incurred, limited to 3% of the allowable expenditure, as opposed to 100% previously.
Labuan IBFC activity carried out on the island is subjected to substantive conditions as determined by a committee, while income from intellectual property assets held by Labuan entity is subjected to the prevailing income tax rate under the Income Tax Act 1967.
Lim, in his budget speech, said the government will continue to enhance Labuan's competitiveness by removing restrictions on trade in ringgit, transactions between Labuan and Malaysian residents, as well as maintaining the current tax rate of 3%.
However, the tax ceiling of RM20,000 under the Labuan Business Activity Tax Act 1990 will be removed.
The LIBFC was set up as an offshore and mid-shore services centre to provide a wide range of business and investment structures facilitating cross-border transactions, business dealings and wealth management needs.
In the middle of this year, Labuan Financial Services Authority announced that it achieved a 19.1% growth or 941 new companies in 2017, compared with 790 companies in 2016.
PETALING JAYA: The special voluntary disclosure programme and tax enforcement measures stole the limelight in Pakatan Harapan’s maiden Budget 2019, as opposed to initial expectations of a slew of new taxes being introduced.
Finance Minister Lim Guan Eng announced during the tabling of Friday’s budget, that the Special Voluntary Disclosure Programme will enable taxpayers to voluntarily declare any unreported income for Malaysian tax purposes, including that which is in offshore accounts.
Declarations made between Nov 3, 2018 and March 31, 2019 will be imposed a penalty of 10%.
The penalty will then be raised to 15% if disclosures are made between April 1 and June 30 next year.
Those who come forward after the window will be subjected to penalties ranging between 80% to the maximum of 300%, as provided for in existing tax laws.
The Inland Revenue Board (IRB) will also scrutinise and investigate unexplained extraordinary wealth displayed through possession of luxury goods, jewellery, handbags or property.
The tax authority will use all necessary measures permitted by the law to recover such monies, whether in the form of additional taxes, penalties or fines.
Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai told SunBiz that this is an opportunity for the subjected group to take ownership, make disclosures and pay their taxes.
He also noted that the most concerned is likely to be the wealthy, given that wealth is concentrated in the hands of a small group, as well as those who have not been paying their taxes properly.
This, Thanneermalai said is also an indication of stricter enforcement in the future, while acknowledging that enforcement is a little weak at the moment.
K-Konsult Taxation Sdn Bhd managing partner Koong Lin Loong, on the other hand, welcomed the move as it serves as an opportunity for people to come forward before being heavily penalised.
Lauding Lim’s flagship budget, Koong terms Budget 2019 as a balanced one which defied expectations of new taxes and “taxes which were difficult to implement”. He opined that taxes such as the sugar-sweetened beverages tax are positive, and will not burden the public.
The government’s move to increase stamp duty on the transfer of property valued more than RM1 million to 4% from 3% is also seen as positive as it will not affect the middle and low-income group.
Meanwhile, he said the time frame of implementation for the revised Real Property Gains Tax (RPGT) for disposals of properties or shares in property holding companies after the fifth year, should have been clarified further and capped at the seventh year and not go any further.
The revision stipulates a tax rate to be increased from 5% to 10% for companies and non-citizen and non-permanent resident individual and from 0% to 5% for Malaysian individuals.
However, low cost, low-medium cost and affordable housing with prices below RM200,000 will be exempted.
Thanneermalai, on the other hand, said while Budget 2019 was a sensible one, it could have been better.
He noted that measures such as the reduction of corporate income tax to 17% from 18% for small and medium enterprises (SMEs) with taxable income of up to RM500,000 and SMEs with less than RM2.5 million in paid-up capital; limiting the carrying forward of losses and allowances for tax reliefs to a maximum of seven years and the sugar-sweetened beverages tax – are good.
With the implementation of taxes on online services imported by consumers which are set to come into force on Jan 1, 2020, Thanneermalai said there should at least be a reduction of the 28% income tax, which is too high.
“He (Lim) has done a lot of things that have not taken place in the past but he could have gone further,” he added.
Thanneermalai also said Lim could have elaborated on the taxes that are to be introduced in the future and the rationale behind moving from one set of taxes to another range.
PETALING JAYA: The small and medium enterprises (SMEs) emerged as one of the biggest winners in the 2019 Budget, said the Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.
“I think the biggest surprise coming from the (tax) incentive, is the 1% cut in the corporate tax rate,” Lee told SunBiz.
“I don’t think anyone expect (that) but we from the ACCCIM (Associated Chinese Chambers of Commerce and Industry of Malaysia) proposed the measure for the reduction in the corporate tax rate in SME,” he added.
During the tabling of the 2019 Budget, Finance Minister Lim Guan Eng said the government proposed that the tax rate on chargeable income of up to RM500,000 will be reduced by 1 percentage point from 18% to 17% to enhance competitiveness of SME and boost economic growth.
To support the transition and migration to Industry 4.0, the government also allocated RM210 million from year 2019 to 2021 and will assist the first 500 SMEs to carry out the Readiness Assessment to migrate to Industry 4.0 platforms via Malaysia Productivity Corporation.
Lee, who viewed the overall measures announced for the sector as “very positive”, said that it is important for the government to consistently enhance the development of the SME.
He said this is because the industry contributes close to 95% of the manufacturing establishments and are among the major contributor to the country’s gross domestic products, exports as well as employment.
Asked whether the RM210 million fund to promote Industrial Revolution 4.0 (IR4.0) is sufficient, Lee said this is only the initial stage of the fund and he believes that the government will continue to review the fund’s size moving forward.
“They just launched the initial policy on IR4.0. We must understand that the IR4.0 is not something that we can achieved overnight as most of the companies are (now) stuck between IR2.0 and IR3.0 level. And if there is a need, I believe that they will review the fund (not necessarily in the next Budget,” Lee added.
Lee also advised the SME companies to participate in the Readiness Assessment programme to assess and facilitate their preparations for the IR4.0.
Nevertheless, the Malay Economic Action Council (MTEM) CEO Yazid Othman said the council is disappointed with the small allocation provided for the bumiputra economic agenda.
He said the amount of the allocation for the bumiputra agenda is only about RM3.6 billion out of the total amount of RM314.5 billion for the Budget.
“MTEM worries that the Bumiputera Economic Agenda is not given sufficient attention,” he added.
However, he said the council opined that the Budget 2019 is favourable taking into account the current economic and national debt conditions.
To note, the government reduced its allocation for National Entrepreneur Group Economic Fund (Tekun Nasional) to RM100 million under Budget 2019, from RM500 million in the previous Budget.
PETALING JAYA: The latest budget announcement is not expected to stimulate consumer spending in the near term, as there is insufficient economic policies aimed at increasing retail spending, opined retail consulting firm Retail Group Malaysia.
Managing director Tan Hai Hsin told SunBiz that Budget 2019 is focusing more on managing government deficit and social programmes for the B40 group.
“We hope the economic activities will improve significantly in the immediate future. Higher economic activities will lead to higher take-home pays (and higher retail spending subsequently),” Tan said.
Prior to the Budget announcement, he said Malaysian consumers were told that they should not expect monetary incentives from the government in 2019. Malaysians were also informed that more taxes could be expected next year.
“Based on the latest announcement, it should improve consumer confidence. At least in the next six months,” said Tan.
For next year, the government continues to distribute one-off monetary incentives to Malaysians (including civil servants) to reduce their financial burden. About 4.1 million households are expected to benefit from it.
Increment of minimum wage by RM50.00 will also lessen the financial burden of B40 group.
“On the other hand, higher minimum wage will lead to higher cost of goods for retailers. It will lead to higher retail prices eventually.”
He said the soda tax will not have major impact on retail spending, while noting that it is still early to comment on the impact of RON95 until more announcements have been made.
“Same as previous budgets for many years, there were no direct incentive and new government policies related to retail industry.”
Sunway Malls & Theme Parks Chan Hoi Choy said the 2019 Budget balances fiscal discipline while emphasising development in the right sectors.
“Initiatives announced particularly with the emphasis on B40 group is lauded while efforts to grow Industry 4.0 especially knowledge transfer, artificial intelligence development, matching grants will drive higher productivity and cost rationalisation in mall & retail industries.”
Similarly, it is encouraged by the government’s focus in housing, public transportation and education initiatives to form the bedrock for Malaysia’s economy into the future. The drive for greener adoption and women representation also signifies a greater sustainable and inclusive approach.
“We take note of the significance of Malaysia’s economy projected GDP growth rate of 4.8% for 2018 and 4.9% for 2019, against IMF’s projected slowdown of global growth of 3.7% in 2019. This underscores the relative resilience of the Malaysian economy in face of global headwinds and protracted trade war. In the light of this and the current country’s fiscal position, the overall Budget 2019 is targeted while exercising prudence,” said Chan.
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