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Asean is projected to sustain a positive economic trajectory in the near term, with regional real gross domestic product (GDP) growth of 4.7% in 2024 and 4.8% in 2025. For comparison, the International Monetary Fund forecasts Malaysia’s growth at 4.4% in both 2024 and 2025.
Unctad’s World Investment Report 2024 shows that Asean continues to maintain strong foreign direct investment (FDI) growth. While global FDI flows declined 2% in 2023, Asean recorded FDI growth of 1.2%, with Malaysia seeing a 15.3% surge in foreign investments from 2022 to 2023. It is also welcome to note that Malaysia’s ranking in FDI size among Asean countries had risen from No 6 in 2020 to No 4 in 2022.
Despite these favourable statistics, there is concern about the high debt-to-GDP ratios in the region. The Asean Secretariat had forecast interest payments for low-income nations to nearly double in 2024, and expects the region’s fiscal policies to tighten throughout 2024 as countries seek to rein in debt levels, potentially resulting in higher taxes and reduced government spending.
Ensuring the sustainability of public finances has become more challenging due to the impact of the Covid-19 pandemic, geopolitical conflicts and energy shocks. Interest rate increases implemented in 2022 have caused government debt service burdens in some countries to rise as existing low-cost debt matures, adding to fiscal pressures.
As a result, it is no surprise to observe a general trend of increasing taxes across Asean in recent years. Common measures include:
Increase in consumption taxes: Indonesia and Singapore have increased the rates of their respective value added tax (VAT) and goods and services tax (GST). Indonesia increased its VAT rate from 10% to 11% in April 2022 and has plans to increase it to 12% by 2025. Singapore increased its GST from 7% to 8% in January 2023 and to 9% in January 2024. Vietnam and the Philippines implemented higher excise taxes on certain goods, such as tobacco and alcohol. A few countries in the region, including Malaysia, have introduced a tax on sugary drinks while others have initiated studies to do the same.
Tax on digital services: Indonesia, Malaysia, Singapore and Vietnam have all introduced some form of services tax or GST on digital services.
Digitalisation of the tax administration: Malaysia, Indonesia, Vietnam and Singapore have all introduced e-invoicing, with Thailand targeting to mandate e-invoicing by 2028.
Global minimum tax: Vietnam has implemented the Income Inclusion Rule and Qualified Domestic Minimum Top-up Tax in 2024, while Singapore and Malaysia will introduce these in 2025. Thailand and Indonesia are likely to implement the global minimum tax in 2025 as well.
Introduction of carbon tax: Singapore has introduced a carbon tax, with Thailand and Indonesia likely to implement this in 2025. That said, the primary reasons for the introduction of carbon tax are the reduction of carbon emissions and promoting sustainable development, not to increase tax revenue.
Notwithstanding the above measures, Malaysia, Indonesia, Thailand, Vietnam, Singapore and the Philippines continue to rely on fiscal incentives to attract FDI.
Most, if not all, of these jurisdictions have work streams to explore and develop fiscal incentives that continue to be relevant and attractive to investors despite the introduction of a global minimum tax.
In its 2024 budget statement, Singapore announced the introduction of the Refundable Investment Credit scheme. This new tax credit is designed to incentivise businesses to undertake high-value and substantive economic activities in the city state. This initiative aims to keep Singapore competitive and attract global investments by providing financial support for significant projects. It will be interesting to see how Malaysia’s tax incentive regime is refined in the light of global and regional developments, such that the incentives remain relevant to investors and also benefit the country and the rakyat in a significant and measurable way.
Malaysia’s response to improve its fiscal position is aligned with the other Asean countries. However, its tax-to-GDP ratio is still below that of Singapore, Thailand, Vietnam and the Philippines, though higher than that of Indonesia. Hence, there is pressure on Malaysia to increase its tax base. The question is what more can Malaysia do? As seen above, it has already triggered many levers to increase tax revenue.
Malaysia’s corporate tax rate is the second highest in Asean. There is little room to increase it further and, in fact, the expectation (or hope) of businesses is for a reduction. In terms of personal income tax, our highest band sits at 30%, which is higher than Singapore at 24% and lower than the 35% in Indonesia, Thailand, Vietnam and the Philippines. Again, there is not much flexibility to use this lever to increase tax revenue, especially given the relatively low number of individuals in the highest income brackets.
The introduction of e-invoicing is expected to increase tax revenue through increased transparency and disclosure, but this will be gradual as implementation is being carried out in phases.
The two other measures that have been considered to make a significant positive impact on our fiscal position are the withdrawal of subsidies and the broadening of the consumption tax base.
We have seen the start of the former with utilities and diesel subsidies. The more challenging to execute would be the rationalisation of the petrol subsidy, which would have a significantly more widespread impact. The broadening of consumption taxes has been hotly debated, with many advocating for the return of GST. However, there are also concerns about the regressive nature of the tax and its impact on the B40 group.
Perhaps with the full-fledged implementation of e-invoicing, the authorities will have the required data to provide targeted subsidies for the B40 group to ease the financial burden that may arise from the withdrawal of subsidies, or the introduction of additional taxes. In the meantime, we may see another round of expansion of the sales and service tax.
Could the introduction of dividend withholding tax be on the cards? Indonesia, Thailand and the Philippines have withholding tax on the distribution of dividends, but Singapore and Vietnam do not. In the near term, dividend withholding tax is probably not the answer given Malaysia’s aspiration to be the preferred destination for the setting up of regional and global hubs.
Tax reforms are inevitable and expected. The only question to ask is for the government to engage with the relevant stakeholders to ensure implementation is well thought out and for reasonable notice to be given prior to the implementation of any changes, to allow impacted parties to prepare and budget for the impact.
In recent years, it is acknowledged that early engagement from the authorities is becoming the norm, as evident in the introduction of e-invoicing and capital gains tax. This is very welcome, as businesses and investors value predictability and stability in a tax regime and appreciate that the views of impacted parties are taken into account before legislative changes become effective.
A new paradigm for the production of nuclear energy could change the calculus for both artificial intelligence and cryptocurrency mining, but it requires substantial upfront investment in relatively untested technologies.
The US will soon develop and deploy its first commercial small modular reactor (SMR). An SMR is a nuclear power source with a much smaller infrastructure footprint than traditional fission reactor plants. These so-called “next generation” reactors are also purported to be much safer.
While small reactors have been around since at least the 1950s, the advent of SMRs could serve as a game-changer for large organizations such as AI training and data centers and cryptocurrency mining facilities.
Unlike traditional reactors, SMRs can be manufactured in a factory and then shipped to a client’s location. Functionally, these platforms can be set up to produce as much as 300 megawatts of energy and could feasibly be built almost anywhere.
There are currently hundreds of peer-reviewed research articles available on the subject of cryptocurrency and clean energy. Many large mining companies have begun exploring nuclear power as a safe, clean alternative to traditional energy infrastructure.
However, the primary factors keeping the average cryptocurrency mining facility or artificial intelligence data center from relying on nuclear energy are availability and the high upfront costs of construction.
SMRs solve some of those problems. They’re purportedly easier to develop, require less maintenance and operational staff, environmentally friendly, and are theoretically substantially more economically feasible over the long term than alternative solutions including large nuclear reactors. However, they still require a significant upfront investment to develop.
Kairos Power, a United States-based nuclear engineering company, recently inked a long-term deal with Google to develop and bring the company’s first SMR online “quickly and safely by 2030,” with continuing rollouts planned through 2035.
Michael Terrell, senior director of energy and climate at Google, lauded the deal as a win for clean energy:
“This landmark announcement will accelerate the transition to clean energy as Google and Kairos Power look to add 500 MW of new 24/7 carbon-free power to U.S. electricity grids.”
Google’s commitment to developing what may ultimately become the first commercial US-based SMR manufacturing partnership represents the opening bell for the nascent commercial nuclear power industry.
While not every company has pockets as deep as Google-parent corporation Alphabet, the cost of entry for on-site nuclear power is likely to drop as the first generation of SMRs are manufactured and improved upon over time.
Ultimately, barring a fusion breakthrough, SMRs could be the cryptocurrency mining industry’s most economically efficient and environmentally friendly method for energy generation.
The eurozone economy has been struggling since late 2022, but its labour market has continually been overheating. It's been something of a conundrum that the unemployment rate is at historic lows of 6.4%, given the economy's hardly grown for two years. In 'ordinary' times, that labour pressure would never have been so intense. But we are now getting back to some sort of normality. The days of stagnation without rising unemployment are set to come to an end.
Look at vacancy rates. They've been coming down from historical highs, but they're still above pre-pandemic levels. Coming down, too, is the number of businesses reporting that labour shortages are limiting their growth. Those two things normally coincide with recession. But, despite the weak economic data we're getting month after month, that's not where the eurozone is right now.
So, we're arguing that we're starting to transition into something far more normal, and it will have a more noticeable effect next year, with unemployment creeping up and wage growth trending markedly lower. Here's why...
Okun’s law suggests a higher unemployment rate, but vacancies are dropping
The labour market has seen two clear breaks after the initial pandemic shock in 2020: a drop in hours worked and a decrease in productivity. Average hours worked by Europeans dropped markedly due to short-time work schemes and lockdowns, and they've never fully recovered. Similarly, the productivity of Europeans per hour worked has also not been able to match the pre-pandemic trend of already lacklustre labour productivity growth.
The combination of those two breaks has resulted in extra demand for workers to match the gap of fewer hours worked per person and less output produced per hour worked. Assuming total economic output remains constant over time (despite the limitations of this assumption) and that labour productivity and average hours worked continue their pre-pandemic trends, there would be a need for 4.3 million fewer workers than are currently employed.
Productivity and work hours have seen a trend break since the pandemic, favouring extra workers
While the reasons for the slow productivity and average hours worked are not clear-cut, it does look like this has happened in a time of significant labour hoarding. Businesses afraid of losing good workers have held on to them at lower output or lower hours worked to make sure that they don’t have to replace them in a labour market that is so overheated. In the US, there was anecdotal evidence about retention bonuses being given to keep people on board. For Europe, you could argue that fewer hours and lower output are like a retention bonus-in-kind at the moment.
Besides that, the public sector has increased expenditure significantly since the pandemic, which has resulted in rapid growth of employment in the (semi-) public sector. Employment in the sector is now about 7% larger than before the pandemic, while private employment is just 3% above the level of the fourth quarter of 2019. This adds to the labour shortages experienced in the private sector, and given that the (semi-) public sector, on average, works fewer hours and has lower productivity, it seems to have contributed to the breaks in trend mentioned before through a compositional effect.
(Semi-) public employment has far outpaced private employment growth since late 2019
The extraordinary increase in labour shortages has happened at a time when profit growth soared thanks to the high inflation environment. This has allowed businesses to absorb the extra costs of hoarded labour in their margins as margin growth was very strong anyway. In that light, labour hoarding looks like a sign of luxury that companies could “afford” due to the inflation shock.
With inflation normalising and the economy slowing, profit growth has again come under pressure. At this point, growth in companies’ gross operating surpluses has fallen from over 10% in early 2023 to less than 1% now. This has already coincided with a lower vacancy rate in the same period, but employment has remained high. Worries about labour availability, also related to ongoing and accelerating demographic change, remain, but with profit growth close to zero, the affordability of labour hoarding looks very different to that in 2022 or 2023.
Profit growth has faltered as inflation normalised making further wage bill increases much more painful
Even though profit growth has dropped to levels close to zero, wage demands continue to come in high. When looking at different countries, Germany and the Netherlands still stand out with high wage demands, while others seem to moderate more quickly. From a union perspective, this difference is understandable as the Netherlands and Germany have not yet seen their real wage growth catch up with pre-inflation shock levels.
Still, with profit growth already falling quickly and a series of negative headlines from industrial companies, particularly in Germany, the question is what is going to give. Will corporates take this in their margins? Will they lay off workers? Or will they negotiate wage growth down?
Real wage growth is still returning to pre-inflation shock levels
Our expectation? All of the above. Unions will likely start to worry more about possible unemployment now that real wage growth is approaching or has exceeded levels seen before the inflation shock. The rise of China as an industrial competitor and the broader debate about Europe’s weakening competitiveness will also enter the equation of both unions and employers. As a result, wage growth should clearly slow down over the course of next year. The alternative is an increase in redundancies and bankruptcies, although we don’t expect this to be dramatic.
At the same time, governments are starting to tighten their belts. While this is happening at different speeds and with differing effects on employment, we do think that the pace of employment growth in the (semi-) public sector will be under pressure because of it.
All of this means that the current labour market situation is not a new normal. We expect a period of normalisation to start with the end of high inflation and profit growth as the trigger. In fact, we already see some of this happening right now. But, we do expect the impact on unemployment and bankruptcies to become more visible in 2025, with a modestly increasing unemployment rate as a result. Similarly, with real wage growth recovering to pre-crisis levels, we expect a drop in wage growth also to occur in 2025.
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