Higher oil prices, sales tax to mask repeal of GST in Malaysia

KUALA LUMPUR – The announcement by incoming Prime Minister Mohamed Mahathir that he will repeal the 6% goods and services (GST) tax effective June 1 and replace it with a sales and services tax (SST) is not causing undue concern in banking and financial circles.

Natixis, the French banking group, argues that repeal of the GST is not as negative as many analysts had feared as it is offset by the re-introduction of the SST and the rise of oil prices.

“Our analysis shows that both the increase of subsidy and repealing of GST would cause the deficit to widen only to 3.7% in 2018 from 3.1% in 2017 and to 4.2% in 2019,” Natixis says. “As the GST was introduced to counterbalance the significant drop of oil contribution to the budget, as oil rises, it becomes less key.”

ANZ Bank says that, in its view, the market need not fear fiscal slippage because there is sufficient flexibility to pay for election promises and to maintain the previous Administration’s fiscal consolidation path.
“Higher oil prices will help, providing a boost to Government revenues. However, greater reliance on oil-related revenues will expose the fiscal position to fluctuations in oil prices. Reducing non-essential spending, if implemented successfully, will be a qualitatively better outcome,” ANZ says.
Natixis also addresses the argument that the GST is a tax directly to consumer while the SST is a tax to producer and includes exports, which reduces Malaysians’ corporates competitiveness.
“We looked at the external exposure of the top 30 largest firms listed in the Kuala Lumpur Stock Exchange and it is overwhelmingly domestic-dependent, except for basic materials, diversified and cyclical consumer sectors,” Natixis says.
“In other words, we do not expect the SST to materially impact Malaysian exporters’ competitiveness or the economy.
“Indeed, the repeal of GST, while only marginally negative for the fiscal deficit, will be a boon for consumers, who have been upset that they bear the burden of poor fiscal management and came out to vote against the establishment.”
www.natixis.com www.live.anz.com (ATI).