There two upcoming major changes to Malaysia’s economy which would take place next year: 1) The implementation of a 6% Goods and Services Tax (GST); and 2) the termination of fuel subsidies.
With so many Malaysia-based companies listed in Singapore (there are 31 to be exact and there are many more which have businesses in Malaysia), it’s worth thinking about how the new policies can affect business conditions in Singapore’s northern neighbour. Let’s take a look at how a number of different companies with significant exposure to Malaysia might be affected.
With the new GST in place, there would be an increase in both retailers’ cost structure. If they are able to pass through this cost increases to consumers, then all’s well and good. But, even so, they might still see some period of weaker operating margins before consumers have fully absorbed both companies’ price increases.
Furthermore, the termination of fuel subsidies will also see the price of fuel float along with market prices; this might cause a portion of both retailers’ expenses to be more volatile in the future.
As Malaysia accounts for between a quarter and a third of both retailers’ annual revenue, this is certainly a situation worth watching closely for investors.
Riverstone Holdings Limited (SGX: AP4) is a manufacturer of gloves for the electronics and healthcare industries. As its gloves are mainly exported, the company is actually classified as “zero rated” under GST-related regulations. This means that the company is not required to collect GST when exporting its products and it can even make claims for any GST-related expenses it has incurred during its production process.
Therefore, other than the potential for fluctuating fuel costs in the future, it would seem that Riverstone Holdings is well shielded from the new policies.
The service providers
Silverlake Axis Ltd (SGX: 5CP) is a software and e-solutions provider for many financial services companies in the region; up to 40% of “leading South-East Asia banks” use the company’s technological solutions. Given its strong position in South East Asia, it’s perhaps only natural to find that the company is providing the core banking systems for many of Malaysia’s major banks.
Although the 6% GST will likely affect Silverlake Axis’s operations, the impacts to the company would not be as high as those potentially-faced by retailers. This is because there is already a 6% service tax in Malaysia for all service companies; so, the GST will be more of a replacement tax rather than an additional tax for Silverlake Axis.
The two new policies by the Malaysia government is a sign that the country is trying to transition its economy from its traditional export and agriculture focus to one which is consumer-led. Although there would be short-term challenges for the country and companies that operate within, these changes might be a good thing for the country over the long run.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.