KUALA LUMPUR: Morgan Stanley Research estimates Malaysia’s fiscal deficit could widen by at least 0.3% in 2015, should crude oil prices fall to US$66 (RM230.34) per barrel.
In a research report yesterday, Morgan Stanley commented that every US$10 per barrel fall in oil prices from US$66 per barrel, would further weaken the fiscal balance by 0.6%.
“The unwinding fuel subsidies and falling oil prices, have a negative impact on Malaysia’s gross domestic product (GDP).
“Persistently, soft oil prices and their impact on government revenue, mean that policymakers would need to cut back on expenditure or increase revenue elsewhere, in order to stay on the fiscal consolidation track,” it said.
In tabling the Budget 2015 in October, Prime Minister Datuk Seri Najib Razak said the government is on the path of fiscal consolidation, and looking to bring the fiscal deficit down to 3% of GDP next year. The projection was made based on the oil price assumption of US$105 per barrel in 2015.
As at 7.14pm yesterday, Brent crude oil was trading at US$64.85 per barrel, up US 61 cents or 0.95%, while the West Texas Intermediate was at US$61.43, up US 49 cents or 0.8%.
Morgan Stanley noted the retail fuel prices were recently marked to market, and this reduces the fuel subsidy burden by potentially as much as 2% of GDP.
“We estimate that every 10% fall in oil prices, would take 0.9 percentage points off headline consumer purchasing index (CPI), from first-round impact,” the firm said.
On the implications of falling oil prices to the monetary policy, Morgan Stanley said their base case is for the policy rate to remain on hold at current level, at 3.25%. However, it foresees that a further softening in oil prices would increase the risk of policy easing by Bank Negara Malaysia.
“Letting the currency weaken, as we have seen recently, would also be a near-term solution to restore competitiveness and mitigate the negative terms-of-trade impact. Indeed, the currency has historically had a strong correlation with oil prices,” it added.
Meanwhile, CIMB Research believes the government could achieve its 3% budget deficit target next year. This, according to the research house, was due to the weakening of oil prices recently, having minimal impact on the country, as Malaysia is a relatively smaller oil net exporter country.
According to the firm, the global oil price would be hovering around US$65 per barrel next year.
“According to our analysis and sensitivity tests, the oil prices are unlikely to fall below US$65 per barrel next year. As such, the fuel subsidy rationalisation programme can cushion the impact of the falling oil prices,” CIMB Research said.
However, it points out that should oil prices fall below US$60 per barrel, then the government should explore other options, such as cutting down the development and operational expenditures to meet their budget deficit target.
“If the oil prices fall below US$60 per barrel, it would definitely affect Putrajaya’s petrol tax and the dividend to the government by Petroliam Nasional Bhd,” added the firm.
This article first appeared in The Edge Financial Daily, on December 12, 2014.