KUALA LUMPUR: The government’s efforts to narrow fiscal deficit to 3% of gross domestic product (GDP) next year could see a setback if crude oil prices remains below US$70 (RM240.80) per barrel, said the Ministry of Finance (MOF).

“The threshold level of the crude oil price that will exert the targeted fiscal deficit is around US$70 to US$60 per barrel,” MOF said in an email reply to The Edge Financial Daily yesterday.

At the time of writing yesterday, Brent crude oil had been beaten down to US$68.65 per barrel, shedding 40.59% since it hit USUS$115 in June this year. The crude oil glut has been the main culprit in the falling oil prices this year, while the Organisation of the Petroleum Exporting Countries’ decision late last week to keep oil production at 30 million barrels a day further aggravated the plunge.

Notably, Malaysia’s oil revenue contributed about 30% to the government’s coffers in 2013. The main sources derived from petroleum income tax, petroleum royalties, petroleum export duties and dividends from Petroliam Nasional Bhd (Petronas).

CIMB Investment Research economist Julia Goh said the government’s ability to meet its fiscal deficit target would depend on the average oil price for 2015 where if it falls below US$65 per barrel, there would be a risk that the government would be unable to meet it.

“In my view, the average price for crude oil in 2015 should be between US$70 and US$80 per barrel. At that price range, I believe that the fiscal deficit target would be met,” Goh told The Edge Financial Daily yesterday.

In 2008, crude oil prices saw severe swings due to the global financial crisis. Brent crude peaked at US$146.08 per barrel in July before sliding to a low of US$36.50 per barrel in December. For 2009, the government collected RM27.2 billion from petroleum income tax, where the price of crude oil (Tapis) averaged at US$65.42 per barrel.

Meanwhile, Budget 2015 assumes the average oil price to be at US$100 to US$105 per barrel and is expected to reap RM25.6 billion from petroleum income tax.

Petronas president and group chief executive officer Tan Sri Shamsul Azhar Abbas was reported as saying that payments to the government could be lower by 37% next year if oil prices hover at US$75 per barrel. This would represent a RM25 billion shortfall in oil revenue contribution.  

In a report, Bank of America Merrill Lynch Research opined that the RM25 billion fall in contribution would be larger than the fiscal savings from the scrapping of fuel subsidies, which it estimates to be about RM18 billion.

“We now expect fiscal deficit to come in at about 3.8% of GDP in 2015, widening from 3.5% of GDP this year. The government is likely to miss its fiscal deficit target of 3% of GDP in 2015, despite the scrapping of fuel subsidies, in our view,” it said.

However, MIDF Research pointed out in a report that the government’s petroleum revenues do not seem to correlate with oil prices as it mainly derives the bulk of the revenues from Petronas’ petroleum dividends.

“Petronas does not have a fixed dividend policy. From 2008 to 2011, following the aftermath of the global financial crisis, the quantum of Petronas flat payout increased and maintained at RM30 billion per year. It was a 25% increment from RM24 billion in 2007. The payout is estimated to be RM29 billion for 2014 and budgeted to decline further to RM27 billion in 2015,” said MIDF Research.

It estimated that the government could see a shortfall of RM6.3 billion in projected income in 2015 due to the lower oil revenue.

This article first appeared in The Edge Financial Daily, on December 2, 2014.