Why Malaysians Will Spend Less In 2015

Despite the perpetual hustle and bustle in local shopping malls, many Malaysians are tightening their purse-strings and are readjusting their budgets in anticipation of 2015 price increments.

The high volume of shopping mall patrons has not been reflected in the number of sales transactions, as only a small percentage of patrons do ‘serious shopping’ or  actually make purchases, the Malaysia Retail Chain Association (MRCA) president Dato’ Liaw Choon Liang told The Star.

A study by Nielsen, a global information and measurement company showed that four in five Malaysian consumers are cutting back on shopping expenditure to improve household savings.

The study done on consumer spending intentions around the globe found that Malaysians are trimming their household spending on new clothes (38%), gas and electricity (37%), out-of-home entertainment (30%), grocery brands (by switching to cheaper brands; 30%) and telephone expenses (22%).

Malaysians will likely continue tightening their belts in 2015. Here are some reasons why Malaysians will spend less in 2015:

1. Goods and Services Tax

Prices of goods and services nationwide are expected to go up following the implementation of the Goods and Services Tax (GST) from April 1, 2015.  It will replace the current Sales tax (10%) and Service tax (6%) in Malaysia.

Under GST, most goods and services (except basic necessities) will be charged a tax rate of 6% at every stage of the supply chain. Prices of goods are expected to increase by 1.8%  on average as a result of GST. Naturally, many Malaysians are concerned with what this bodes for prices in general.

For example, the price of watches are expected to go up because it is currently exempted from any sales tax.

Prices of (private) healthcare services and certain medications are also expected to rise with GST. While healthcare is “GST-exempt”, many items and services that are part of the process such as private doctors working in private hospitals are not.

Currently, all registered medication are exempted from the sales and service tax. With the new tax system, non-essential drugs would be taxed. The easiest option for hospital operators to manage the increased costs is to pass it on to patients.

Real estate prices are also expected to rise by about 2.6% once GST comes into force, according to the Real Estate and Housing Developers’ Association Malaysia (Rehda).  Although housing is exempted from GST, the construction costs involved such as land cost, material cost (concrete, steel, roof tiles, bricks) and labour costs are not, and will contribute to higher property prices.

The good news is, prices of soft drinks, clothing, electrical products and cars are expected to drop, as they are currently tagged with a 10% sales tax, and would be revised to the 6% GST in April.

However, with the long-term effects of GST yet to be determined, many consumers have adopted a wait-and-see approach and are clinging onto their hard-earned savings for rainy days.

2. The weakening ringgit

In December 2014, the Ringgit hit an all-time low in five years as emerging Asian currencies lost ground due to retreating crude oil prices.

Bloomberg called the depreciation a ripple effect and “reflection of the absolute collapse in oil”. Because oil is one of Malaysia’s main exports, making up for 30% of total revenue in 2014, the declining price of crude oil by 40% from its June high has had a significant impact on our currency.

A trade-dependent country, the declining value of the Ringgit will raise the cost of importing raw materials, leading to increased production costs and decreased profit margins for Malaysian businesses. The danger with weaker profits is cost cuts and subsequently, job losses.

For the general public, the devaluation of the Ringgit means a reduction in purchasing power with their incomes when buying imported goods or when travelling abroad. For example, the exchange rate between the Ringgit and the US dollar has gone up from 3.2805 to 3.5 between 2013 and 2014.

The weakening Malaysian currency could accelerate inflation and raise the cost of living that is already a burden for many median-salaried citizens.

But all is not gloom and doom. Industries that can benefit from the weaker Ringgit include export-driven sectors, tourism, retail and education.

3. Higher credit card requirements

In 2014, Bank Negara Malaysia (BNM) raised the minimum income requirement to own a platinum credit card from RM24,000 per annum (that’s RM2,000 per month) to RM60,000 (RM5,000 per month) in an effort to curb rising household debt.

Platinum credit cards traditionally offer premium benefits and higher-spending limits, and are typically aimed at high-income consumers. The rationale is simple – those from higher income ranges are more likely to spend more and process costlier expenditures, and this translates to higher profit margins for credit card companies.

The RM60,000 minimum annual income requirement to qualify for a platinum credit card also puts many Malaysians – who make a mean monthly household income of RM5,000, according to the Household Income Survey (HIS) – out of the picture.

While the change was implemented in the middle of last year, the after-effects will likely continue into 2015. The reduced credit card benefits and privileges could discourage spending and consequently, result in decreased overall expenditure among Malaysians.

You can still leverage on your spending by finding the best credit card for your lifestyle.

One way to beat inflation and to keep up with the cost of living is to grow your money with investments like property, unit trusts, REITs and even by putting your savings in a fixed deposit if you are planning to save money on the short-term. A well-diversified investment portfolio can help pave your path toward a more secure financial future.