KUALA LUMPUR: With 30% of government revenue coming from oil, it would be a challenge for Malaysia to meet its 3% fiscal deficit target for 2015 if prices of the commodity stay depressed, said Chua Hak Bin, head of emerging Asia economics at Bank of America Merrill Lynch.

“The probability of a miss in 2015 is high if global oil prices stay low or fail to recover significantly,” he told The Edge Financial Daily.

Chua estimated that a 10% fall in oil prices “will worsen the fiscal deficit by about 0.2% of gross domestic product (GDP), even after accounting for lower fuel subsidies”.

“If Brent crude oil stays at about US$85 [RM278.80] — which is some 20% below levels of a year ago — Malaysia could see a material drop in oil-related fiscal revenue [which accounts for a large 30% of total revenue],” said Chua, adding that direct petroleum income and royalties, which accounted for RM36 billion or 17% of government revenue in 2013, are historically sensitive to movements in global oil prices.

Malaysia is estimated to have assumed an oil price of around US$100 per barrel when drawing up Budget 2015 that was tabled on Oct 10, down from US$110 per barrel in Budget 2014.

Brent crude oil prices have skidded 25% since mid-June to settle at US$80.52 per barrel on Oct 22, a level last seen in October 2012, and was going for US$83.05 a barrel yesterday. Tapis, which fetches roughly a US$10 premium to Brent and is the benchmark used for Petroliam Nasional Bhd’s (Petronas) fuel with lower sulphur content, fell to a four-year low of US$88.46 on Oct 16.

While Petronas maintained its RM30 billion dividend payment even when oil prices fell to as low as US$70 in early 2009, Chua reckoned that payments — which accounted for about 13% of government revenue or RM27 billion in 2013 — “may come under some pressure this time around because of heavier investment commitments”.

“Dividends have been falling in recent years,” Chua said, pointing out that dividends from Petronas were RM26.3 billion in 2012 versus RM30 billion in 2011. The national oil company, which saw its net profit fall 17% to RM49.4 billion in 2012 before recovering to RM54.1 billion in 2013, had asked to cap the dividend payments to 30% of its net income in 2014 instead of about half of its earnings, but was turned down.

“Malaysia’s net oil trade balance is close to zero so far this year. At [current depressed] US$85 levels, 20% below the level a year ago, Malaysia will likely run an oil-trade deficit in 2015 [to be a net oil importer],” he said.

CIMB Research economist Julia Goh concurred that government revenue “will be affected by weaker global oil prices”. Nonetheless, she said Malaysia could stand to benefit from the recent fall in global oil prices, particularly if global demand is aided by higher discretionary incomes which feed into export demand.

Pointing out that Malaysia is a net oil importer based on the January to August 2014 trade data in a note dated Oct 17, Goh expects Petronas’ dividend payments “to be quite constant” and the significance of oil revenue to be reduced by additional income from the implementation of the goods and services tax (GST) from April next year. Malaysia expects to see RM5.6 billion net increase in income.

“As such, we do not see any real risk to the fiscal deficit target of 3% of GDP next year,” she said, projecting Malaysia’s GDP to expand by 6% in 2014 and 5% next year, the lower end of the official 2015 projection of 5% to 6% GDP growth.

However, Goh also expects any benefit from the lower oil prices in the next six months to be neutralised by the impact of the GST on consumer spending.

“We are unlikely to see the positive pass-through effect to disposable incomes yet because the fixed price fuel subsidy system remains in place. We calculate that the current Brent and Tapis are almost the same as the market price,” she said.

This article first appeared in The Edge Financial Daily, on October 24, 2014.