WHILE the federal government is thinking hard about rebuilding in the aftermath of the recent floods in the East Coast, it also realises that another bigger problem is looming — a yawning budget deficit against the backdrop of falling crude oil prices.

Prime Minister Datuk Seri Najib Razak has said his administration will have to relook Budget 2015 and will issue a statement this week.

An indicator of how much the flood damage will cost the government can be derived from studies by the Department of Irrigation and Drainage and Malaysian Meteorological Department, whereby the estimated cost is RM1 billion to RM1.5 billion annually.

But this estimate is based on the annual floods during the monsoon season. The severity of the recent floods will require a much larger sum for rebuilding.

Already RM500 million has been allocated for flood relief, while Budget 2015 has included over RM1 billion for flood-related work.

The budget has also allocated RM2 billion for contingencies, into which the government can dip to finance the rebuilding. But once this is done, how much will be left for contingencies for the rest of the year?

Economists believe that the government will have to cut public expenditure if it wants to achieve its fiscal deficit target of 3% of gross domestic product this year. It trimmed its fiscal deficit to 3.9% in 2013 and is targeting to slash it to 3.5% in 2014.

“The government will have to cut [budgeted] spending by RM10 billion to RM15 billion to make up for the drop in crude oil prices,” Dr Yeah Kim Leng, dean of Malaysia University of Science and Technology’s School of Business, tells The Edge.

Brent crude prices have tumbled below US$50 per barrel from a high of US$115 in June last year. This is certainly an issue as oil revenue makes up a third of the country’s coffers. The national budget was also drawn up based on the assumption of crude oil prices at US$100 to US$105 per barrel.

“The revised budget will have to look at reassigning where the funds [to finance rebuilding after the floods] will come from and consider other sources of revenue,” says Yeoh.

“A budget cut is necessary to be in line with the expected drop in revenue to achieve the targeted fiscal deficit. Proposing a cut to that target may create a negative impact on growth, so that would be too drastic.”

He believes that given the circumstances, it would be good enough if Malaysia’s fiscal deficit missed its target and remained at 2014’s level.

Chris Eng, head of research at Etiqa Insurance & Takaful, concurs, saying that the budget deficit may be slightly higher than the 3% target.

He says he expects the government to make some practical changes to the budget, which could include “more reasonable oil price assumptions, more flexibility on the budget deficit and more clarity on operating and development expenditure”.

For Yeah, the expectation is that Najib’s announcement this week will likely feature a reallocation of spending priorities, where flood mitigation and welfare aid should take a front seat.

To date, Najib has announced an allocation of RM500 million for flood relief.

According to the National Security Council (NSC), the Cabinet has approved RM41 million for 82,000 families affected by the floods. Of that amount, flood victims who stayed at evacuation centres will receive RM500 per family. Those who did not stay at these centres will also get the amount.

The next of kin of those who died in the floods will receive RM5,000. This amounts to RM125,000, based on the death toll of 25 at the time of writing.

According to an NSC statement, the Ministry of Finance banked in the RM500 million into its account on Jan 5. The NSC was expected to make the payouts by Jan 17.

That leaves the NSC with RM459 million, and the Cabinet can still make a decision on how to spend it.

An additional RM96 million was also allocated for the repair of 93 collapsed hillslopes along federal roads in Kelantan, Terengganu, Pahang and Perak. The repairs are estimated to cost RM42 million in Kelantan, RM35 million in Terengganu, RM12 million in Perak and RM7 million in Pahang.

Additionally, Deputy Finance Minister Datuk Ahmad Maslan has said medium and long-term plans to tackle the flood problem will be finalised in the 11th Malaysia Plan, which will be tabled in June.

“The [planned] increase in infrastructure spending will have to be rescheduled and priorities looked at carefully,” Yeah says.

According to him, a prudent course of action would be to cut development spending, whereby less urgent projects should be delayed if they do not impact medium and longer-term growth.

Budget 2015 amounted to RM273.9 billion, almost RM10 billion more than that of 2014. Of this, RM223.4 billion is for operating expenditure (opex) and RM50.5 billion for development expenditure.

According to Yeah, the government could increase its dependence on private sector funding for big-ticket projects, as well as tighten its belt on the opex side.

This article first appeared in The Edge Malaysia Weekly, on January 19 - 25 , 2015.

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