Unless there are offsetting measures over the next one to two years, “the GST’s removal will have a net negative effect on government revenue, even accounting for some budgetary cushion from higher oil prices”, the agency said in a report analysing the new government’s plan to eliminate the tax.

In April, Moody’s reiterated its A3 rating with a stable outlook for the country, giving it good scores for the country’s economic and institutional strength, but moderate scores for its fiscal strength and susceptibility to event risk.

The election on May 9 produced a new government led by Dr Mahathir Mohamad. In its first week, it announced that the broad-based GST, which is 6%, would be “zero-rated” from June 1.

On May 17, the finance ministry said the shortfall in revenue stemming from the ending of GST would be supported by measures to be announced soon, including reinstating the sales and services tax (SST). It did not give a timeline.

Moody’s said today that proposing a new SST act would wait for the next Parliament sitting, expected at the end of June or early July.

In 2017, GST revenue was RM44.3 billion (US$11.2 billion), or 3.3% of gross domestic product (GDP).

“Assuming a stable share relative to GDP, and taking into account seasonal patterns, we estimate the revenue loss from the voiding of the GST at around 1.9% of GDP this year,” Moody’s said.

The agency said if the SST takes effect in July, revenue loss would narrow to 1% of GDP for this year, which will be mitigated by higher oil prices.

“However, higher oil prices are not a permanent substitute for the GST, and are not a reliable offset to lost revenue given the volatility of prices,” the agency said, adding that the GST had reduced Malaysia’s reliance on oil-related revenue.

“Beyond 2018, the reintroduction of the SST will create a revenue shortfall of 1.7% of GDP if the GST remains at zero.”