KUALA LUMPUR (May 22): Rising oil prices may not be a good enough buffer for Malaysia as the country's plan to remove the goods and services tax (GST) could strain its public finances in the longer term, said Morgan Stanley.

In its report on May 21, Morgan Stanley said Malaysia's plan on structural reforms have "not been compelling", although streamlining expenditure and reducing government debt over time, enhancing progressivity of tax regime, reducing dependence on commodity-related revenue and making subsidies more targeted are positive on the fiscal front.

This is because productivity and competitiveness have been neglected, it said, amid the growth support provided by commodities and benign demographics.

"In our view, higher oil price would help to provide some government revenue support in the near term, and every US$10/bbl increase in oil would add 0.5% of GDP to government revenue.

"However, a lag in implementation of spending cuts when GST is removed could still result in a wider fiscal deficit. This may support growth in the near term, but strain public finances longer term.

"Malaysia needs to broaden its tax base as commodity revenue share declines, and the removal of GST unwinds a positive reform," it said in its report.

The research firm also warned that reinstating fuel subsidies would likely lead to a higher fiscal burden.

"Policy proposals to lift competitiveness and productivity, improve the quality of human capital, and spur productive capex will help in addressing some of these long-term challenges.

"Consistent and effective execution of structural reforms would be key, and the pace of reforms would need to be accelerated to raise Malaysia's medium-term potential growth," it added.

However, upside risks could stem from fiscal policy becoming more expansionary, it said, as GST is replaced with a previous sales and services tax, and fiscal deficit widens.

Morgan Stanley said it expects a normalisation after a ramp-up in domestic demand momentum before the 14th general election, with growth moderating but remaining at a healthy level.

Brent crude oil breached the US$80-mark today, up 1.07% to US$80.07 per barrel (bbl) at the time of writing. This translates into a 7% rise in oil price from a week ago, at US$78.43/bbl on May 15.

One year ago today, Brent crude oil was trading at US$53.61/bbl.