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Malaysia: Muted prosperity tax effect on ringgit
PETALING JAYA: The one-off Cukai Makmur or prosperity tax announced under Budget 2022 and episodes of political uncertainty will not significantly weaken the local currency against the US dollar.
Malayan Banking Bhd
head of forex research Saktiandi Supaat told StarBiz the prosperity tax could in the near term potentially have a drag on the equities market as a result of the tax on earnings of companies.
The one-off special tax would be imposed on companies that have a pre-tax profit of above RM100mil, whereby earnings above the RM100mil mark would be taxed at a rate of 33%.
“This might have some negative implications for the ringgit against the US dollar via the foreign equity outflows in the next few quarters, but there are offsetting factors.
“Enhanced compliance in revenue collection implies adherence to fiscal discipline. Fiscal deficit to gross domestic product (GDP) is estimated to narrow to 6% in 2022 from 6.5% in 2021.
“This ratio could further improve to 5% from 2023 onwards while reaching the target of the 12th Malaysia Plan or 12MP (2021-2025) of between 3.0% and 3.5% in 2025. This bodes well for the ringgit against the US dollar.
“At the same time, a record high RM75.6bil in gross development expenditure, a RM40bil business financing package, RM30bil government-linked companies’ (GLCs) capex in renewable energy, supply chain modernisation and 5G infrastructure, etc, under Budget 2022 should be supportive of growth, going forward,” Saktiandi noted.
On net, he said the impact on the ringgit sentiment from Budget 2022 looked to be relatively mild.
As at press time, the ringgit was trading at 4.17 against the US dollar.
The government announced a total of RM332.1bil allocation for Budget 2022, comprising RM233.5bil for operating expenditure, RM75.6bil in development expenditure and RM23bil for the Covid-19 fund.
On the political front, he expects episodes of political uncertainty to taper off for the remainder of the year.
He said, for example, the transition from the previous Prime Minister to the new one was relatively smooth.
Overall, he said it was not much of a changed Cabinet, which enabled the tabling of 12MP in September and Budget 2022 at end-October to be largely on track.
“Furthermore, the agreement between the government and opposition to cooperate on tackling the pandemic and economic recovery could greatly reduce political instability, at least until the next general election (within the next 12 to 24 months).
“Spillovers from political developments to the ringgit should be modest in the interim,” he added.
He expects the ringgit to trade in the range of 4.18 against the US dollar in the fourth quarter (Q4) and in Q1 of 2022, before potentially trending lower on net over time, ending 2022 at around 4.10.
On whether the recent boom in commodity prices could boost the value of the ringgit for the remainder of 2021, Saktiandi added that he did not expect a strong uplift to the local currency from current levels, given signs of “hesitation” in the recent Brent oil rally.
Still, he thinks that the resilient oil prices could be supportive of overall ringgit trends versus the US dollar.
“Our in-house average crude oil price (Brent) assumptions is raised to US$70 (RM291) a barrel for 2021 and US$75-US$80 (RM311 – RM332) a barrel for 2022 from US$65 (RM270) for both years previously,” he said.
Source: https://www.thestar.com.my/business/business-news/2021/11/15/muted-prosperity-tax-effect-on-ringgit