Days after securing a stunning election victory, Malaysian Prime Minister Mahathir Mohamad’s government has delivered a potentially risky fiscal maneuver by replacing the goods and service tax (GST) with a sales and service duty.
The Ministry of Finance said this week that it will lower GST to zero percent from June 1 and reintroduce a sales tax to offset any shortfall in revenue. Rising oil prices — a positive for net energy exporters such as Malaysia — will also support revenues, officials stated.
But some analysts aren’t convinced.
When combined with the return of cash handouts, fuel subsidies — promises made by Mahathir — as well as the country’s large levels of external debt and low reserves, the sales tax isn’t too comforting, said Hamish Pepper, head of forex and emerging market macro strategy research for Asia at Barclays.
“We could be looking at a fiscal deficit for Malaysia next year as much as 4.3 percent of GDP,” he warned, which would be a major spike from 2017’s 3 percent figure. “Sit that in the context of government debt to GDP, which is above 50 percent,” and the final picture is concerning, he continued.
The degree of fiscal deterioration post-election is the primary factor for foreign investment, Pepper stated. And while it’s too early to draw any conclusions, “it’s very much in the hands of the government to do the right thing for investors and ratings agencies,” he added.
If GST was abolished “without adjusting measures,” that would be a credit negative for the country, according to Moody’s Investor Services.
