PETALING JAYA: The service tax hike from 6% to 8% proposed under Budget 2024, can add 10 basis points (bps) to the consumer price index (CPI) growth next year, says CGS-CIMB Research.
“Our calculations show that items affected by the service tax increase from 7% of the total CPI weight, considering the numerous exclusions such as food services and telecommunications,” said the research house.
As a result, the tax hike may only boost annual CPI growth by 10 bps, said CGS-CIMB Research in its economics update yesterday.
Although there were no concrete measures announced in terms of targeted subsidies, it said “any material adjustment to targeted subsidies is likely to affect the CPI, especially in 2024.”
CGS-CIMB Research maintained its CPI projection at 2.8% year-on-year (y-o-y) in 2023 and 2.5% in 2024, pending further updates on the subsidy rationalisation measures.
It also kept gross domestic product (GDP) at 4% y-o-y for 2023, following encouraging growth in 3Q23 advance estimates.
“Despite normalised interest rates, spending activities remained resilient as we believe that government intervention in administered prices and heavy subsidies should continue to promote consumption growth in 4Q23,” added CGS-CIMB Research.The research house also expects public project rollouts to gain pace as the government is seen as keen to make up for all the delays in project approvals in 1H23.
“While growth performance is also tied to external demand, despite the recent subdued trade numbers, we believe the worst is almost over.
“In our view, a potential massive stimulus from China seems likely to take place late 2023, which could improve world demand,” said CGS-CIMB Research.
Meanwhile, Maybank Investment Bank (Maybank IB) Research has lowered its 2023 inflation rate forecast to 2.6% from 3% previously.
However, it raised the 2024 inflation forecast to 3% from 2.5% earlier.
For now, it is pending more information and details on Budget 2024 measures such as the removal of price control and subsidies for chicken, eggs and fuel (diesel and RON95 petrol), service tax hike from 6% to 8% (except services like food and beverage and telecommunications) plus expansion of the services tax base (to include logistics, non-financial brokerage and underwriting and karaoke).
There is also an increase in excise duty for sugar-sweetened beverages from 40 sen per litre to 50 sen per litre, excise duty on chewable tobacco products at 5% or RM27 per kg.
According to TA Research, there is a potential increase in inflation during the final quarter of this year, possibly surpassing the 2% mark, despite it being moderate so far.This is due to several factors such as the diminishing impact of the base effect as headline inflation which moderated to 3.9% in 4Q22 compared with a surge of 4.5% y-o-y in 3Q22 and the Brent crude oil prices have surged to trade above US$90 per barrel.
“This increase in oil prices could contribute to overall inflationary pressures, particularly the transport index,” it said in its latest report yesterday.
The ringgit has been fluctuating between RM4.70 and RM4.80 per US dollar, which could drive up the cost of imported goods, further adding to inflation.
Also, the potential ripple effect from an increase in imported rice prices could have a cascading effect on food costs, added TA Research.
“As per our current evaluation, we are retaining our projection for the average inflation rate in 2023 at 3%. This aligns with the forecasts presented by both the government and the central bank, which ranged from 2.8% to 3.8%,” it noted.
MIDF Research, meanwhile, has kept its CPI forecast at 3% for 2023.
“As of 9M23, average food inflation registered at up 5.5% y-o-y, equivalent to previous year’s up 5.7%. We estimate food inflation to remain at range of up 5.5% to 6% in 2H23 due to externally challenging environment especially for global agriculture output. Plus, the weakening ringgit, among others, will lead to higher imported inflation particularly via food prices as Malaysia is a net importer for most food products,” it noted.The brokerage firm said non-food inflation would likely average at 1.5% (9M23: 1.4% y-o-y).
“Considering both CPI components, we foresee Malaysia’s headline inflation rate to average at 3% for 2023,” said MIDF Research.
