Malaysia’s political change could be boon or bane for S’porean firms operating there

SINGAPORE – News of opposition coalition Pakatan Harapan’s (PH) historic victory in the 14th Malaysian General Election drew mixed reactions from Singapore companies that conduct business across the Causeway, with some expressing concerns about potential changes in the business environment there.

If PH fulfills its campaign promise to scrap the goods and services tax (GST), that could lead to higher taxes on businesses as it looks for other ways to close the tax revenue gap, they told TODAY. The move to abolish the 6 per cent tax was reiterated by its leader Dr Mahathir Mohamad after their election win on Thursday morning (May 10).

Some bosses felt that the new government could adopt protectionist measures, and that along with the volatility of the weaker Malaysian ringgit could be either a boon or a bane for their businesses in the short term.

However, they said that greater transparency in the government’s rule and laws – which Dr Mahathir had pledged to do – would benefit them in the long term.

Mr Charles Tan, executive director of construction company Sunray Woodcraft said that the “real impact” would only be seen after a month or more.

“It is too early to see how it would impact our business, we have to give a week or two to see how the entire environment is,” he said.

The company had previously done some currency hedging, when the ringgit weakened against the Singapore dollar, and Mr Tan plans to do so if the currency shows weakness.

A weakened ringgit would also help the company save on costs on purchasing construction and building materials such as wood.  

Ms Dora Hoan, co-chairman and group chief executive of skincare company Best World International, which has been operating in Malaysia for 25 years, felt that the election results would not likely have any significant impact on her business. But she was concerned that the falling Malaysian ringgit would hurt their sales there.

“We are more concerned if the ringgit keeps dropping as it will have a strong impact on our business,” said Ms Hoan.

Best World International has close to 20 lifestyle centres in Malaysia, and its cosmetic and skincare products are sold via a distributor. Products sold over there would reap in less revenue due to the conversion from ringgit to Singapore dollars, she added.

With PH proposing to replace GST with the sales and services tax, there is also concern among businesses that the change would have a trickle down effect on taxes for foreign firms.

Mr Tan said this could lead to an increase in business taxes, as he felt that Dr Mahathir has a more protectionist stance towards investments owned by the Chinese.

Mr Cheng Liang Chye, managing director of food manufacturing firm SMC Food 21 was also concerned about what taxation plans the new government would put in place if GST is abolished.

Other bosses like Ms Hoan, however, felt that customers would spend more on her products as her goods are less likely to fall under the proposed sales and services tax.

She added: “I hope that they will not become a mess, and I hope that the new government can fulfill what they promised to do.”

WHAT THE EXPERTS SAY

CIMB economist Song Seng Wun said that the sales and services tax (SST), which was implemented prior to the GST in 2015, applied to goods and services which were more expensive, such as hotel accommodation and restaurant dining. Daily expenses such as groceries were not subject to taxation.  

Mr Song said: “It is a narrower base of taxation. Consumption tax (or GST) is broad based while the SST identifies items to put a tax on. It targets where the money comes from.”

He noted that it is very likely that GST will be scrapped, and added that it “looks like it is a done deal within 100 days”.
“Obviously it will require parliamentary approval. The question on economist’s minds is what do you fill the gap or offset the revenues created by the GST,” he said.

The previous sales tax was pegged at 10 per cent, and he expects it to be around that range if it returns.

According to Mr Song’s estimates, the GST contributes approximately RM$40 billion (S$13.6 billion), while sales tax was RM$20 billion in previous years. He added that the recent resurgence in oil prices could add to the country’s coffers, but that reliance would not be ideal as it would undermine Malaysia’s financial stability.

Maybank economist Chua Hak Bin said it remains to be seen if sales tax would be restored, or if the government would implement other forms of taxes to make up the shortfall.

He added: “They have to see what else they can come up with...or cut back on unnecessary spending. A lot of things are still up in the air.”

POLITICAL STABILITY KEY FOR BUSINESSES

If run well, the new government would ensure political stability in Malaysia, and this would benefit its closest neighbour, said analysts and Singaporean firms.

Mr Kurt Wee, president of the Association of Small and Medium Enterprises, felt that having new leaders at the helm would allow the country to move towards greater transparency and accountability.

“Malaysia went through a tremendous event yesterday, and we really should give the new leaders time to settle instead of speculating too much,” he said.

Mr Tan’s construction firm currently has ongoing projects with international clients in Malaysia, and they operate a production facility there. He said: “As we are (working) long term in Malaysia, the connections have been established... in the long term, less corruption will be better and attract more investments.”

“We would want a stable transition, because it has a ripple effect.”

Mr Chua felt that this was an important time for Malaysia to “reboot and reset things again to bring back investors’ confidence”, particularly after the 1MDB scandal.

He said: “A neighbour that is strong, and focuses on integration and trade would benefit Singapore.”