Malaysia petrochemical trades may get boost from GST removal

Source: ICIS News

2018/05/21

SINGAPORE (ICIS)--Malaysia’s petrochemical trades may receive a boost from increased liquidity when the 6.0% goods and services tax (GST) is scrapped on 1 June, although some market players expect to take cost-related hits from inventory on hand.

But any impact may be delayed until the second half of June, as market activity in the country typically slows down during the Muslim fasting month of Ramadan, which started on 17 May.

“Demand for polymers end-use applications may improve once there is more cash in the hands of consumers, but it could take up to half a year before there is any noticeable improvements,” a local polypropylene (PP) converter said.

The abolition of the GST was announced on 17 May, just a week since the surprise turnout at Malaysia’s general elections, which saw the opposition party Pakatan Harapan (PH) led by Mahathir Mohamad ending the six-decade reign of Barisan Nasional (BN).

Mahathir, who succeeded Najib Razak as Prime Minister and had previously held the same post for more than two decades (1981 to 2003), had vowed during his 2018 election campaign to abolish the GST to allay the rising cost of living in Malaysia.

Although generally regarded as good for the Malaysian economy in the long run, the impending GST removal in less than two weeks will make petrochemical buyers reluctant to procure cargoes.

No one will want to buy any cargoes before June as they know that they can buy at 6% cheaper from June onwards, a local converter said, adding that this would mean his company would have to absorb the GST for its current stocks.

Some players in the polymer industry, on the other hand, were hoping to be able to claim back the tax charge on their existing inventory.

Other market players are still trying to assess the situation and things might be clearer in the coming week, a polymer trader said.

Analysts were cautious over the impact of the new government policies.

“The promise of removing GST was bankable to win popular support given the rising cost of living, but this could prove challenging from a fiscal consolidation agenda perspective,” Japan’s Nomura Global Markets Research quoted P Gunasegaram, an independent consultant, as saying.

However, with oil prices on the uptrend and the cuts in government operating, abolishing the GST could help to “mitigate the shortfall somewhat, though it remains to be seen whether the move is enough and sustainable in the longer term,” it said.

Malaysia’s Ministry of Finance had stated that any resulting shortfall in fiscal revenue from the GST removal will be addressed by specific measures that will be announced soon, including the re-introduction of the sales and services tax (SST).

SST is a single-stage consumption tax imposed when goods are taken out from the plant or factory whereas the GST is a consumerism tax placed on goods and services at every level of production and distribution.

“We are cautiously optimistic on the domestic politics front - acknowledging however that the success of the transition government largely depends on Mahathir's navigation of public policy formation over the next few months as well as continued cohesion of the five-party alliance,” multi-asset macro investment analyst Virgil Fernandez Esguerra wrote in a recent note for investment research and analysis firm Smartkarma.

Malaysia’s economic growth may be dragged down by weaker exports and a slower recovery in investment, Esquerra said.

“Consumption may slow after a likely pre-election boost in H1 2018. Despite campaign pledges to loosen purse strings, any revisions to government spending are unlikely to significantly register until FY19 [fiscal year 2019],” he said.

Malaysia, which is  the third-biggest economy in southeast Asia, posted a first-quarter annualized growth rate of 5.4%, the slowest growth in five quarters; and lower than the previous quarter’s 5.9%, which was also the full-year average in 2017, official data showed.

First-quarter net exports, at Malaysian ringgit (M$) 29.5bn, is the largest since the third quarter of 2011, supported by higher foreign demand, as well as the gradual recovery in commodity prices.

The GDP expansion in the first quarter “was in tandem with steady performances of industrial production, manufacturing sales, distributive trade and external trade during the quarter”, Malaysia based MIDF Research said in a recent note.

“Moderating inflationary pressure, strengthening domestic demand and accommodative economic policies as well as sturdy external demand are the expected major anchors driving up GDP performance in the first quarter 2018,” it said.

Malaysia’s external trade sector is expected to maintain an upbeat momentum in 2018, supporting further economic expansion and development in the country, MIDF Research said.

Focus article by Nurluqman Suratman

Additional reporting by Leanne Tan, Felita Widjaja and Hazel Goh

Picture: Mahathir Mohamad, who leads the Pakatan Harapan party, after casting vote at a polling station during the general elections in Alor Setar on 9 May 2018. He is now the Prime Minister of Malaysia, replacing Najib Razak. (Source: Xinhua/REX/Shutterstock)