THE budget department of the Malaysian Treasury could be spooked by the current low price of crude oil that has fallen by almost half since Budget 2015 was announced, especially since oil and gas takings contribute 30% to total national revenues.
The prime minister tabled a budget of RM273.9 billion last October, when global crude oil prices were at US$100 to US$105 (RM356.44 to RM374.26) per barrel. They have since fallen to below US$50 per barrel and look to continue to dip further. Analysts estimate that for every US$1 drop in the price of crude oil, Malaysia’s oil revenue will decline by RM400 million to RM500 million.
This has both immediate and long-term implications on the national budget. In the short term, the government will probably not meet its budget deficit target of 3% of GDP, perhaps falling back to 4% or more. It will also be important to observe whether international rating agencies will re-evaluate Malaysia’s sovereign credit rating, given these latest changes.
While it is a good sign that Malaysia has now moved away from fuel subsidies to a managed float for fuel prices, low oil prices have become a major setback for maintaining fiscal discipline. The additional takings from the Goods and Services Tax (GST) that will be implemented in April this year may not be enough to compensate for the loss of revenues due to low oil prices.
In order to rein in expenses, the government could very well revise some of its estimated costs, such as those in the category of “supplies and services”, the second highest operating expenditure item in the budget.
“Supplies and services” makes up RM38.1 billion of the 2015 total budget, a more than 60% increase in spending compared with RM23.8 billion five years ago. This is an unusually significant increase for an operating category that basically covers payments for maintenance and repairs, utilities, and for professional and technical services. This is also the category highlighted in the Auditor-General’s reports for its many discrepancies in payments for services.
The long-term and more important implication for those managing the country’s economy is that Malaysia needs to build up its non-oil sector to eventually comprise a larger percentage of total revenues. The truism is that oil-dependent nations are vulnerable to price swings, as is being revealed this year — the sudden drop in global oil prices is an external trend that simply cannot be controlled domestically. It would have an immediate impact on the country’s ability to spend, and even expenditure on basic infrastructure, education and healthcare could be affected.
One way to ensure that the lucrative oil revenues earned during high prices can be sustainably utilised over the long term is to have a natural resource fund. Malaysia already has a natural resource National Trust Fund (Kumpulan Wang Amanah Negara) that is currently managed by the Central Bank. The fund has accumulated about RM9 billion since its formation in 1988 (predominantly supported by contributions from Petroliam Nasional Berhad (Petronas). This is a good start, but the rules governing the fund are still relatively weak. An Ideas policy paper that will be released soon elaborates on this in greater detail.
The idea of a well-governed natural resource fund is not new — it is basically meant to function as a savings fund for future generations. The Norwegian Global Pension Fund is a good example of a natural resource fund that is well managed. It has a full website, complete with information about the fund’s objectives, value and rules on transparency. As it states in its introduction, “The Government Global Pension Fund is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population.” The same should apply in Malaysia.
This would be a more structured way of dealing with oil revenues, as opposed to the government determining how much dividend Petronas should declare annually. The Ministry of Finance has stated explicitly that Petronas does not have the full authority to decide the amount of contribution it should make annually, and that such authority lies with the government as the sole shareholder of the national oil company.
Clearly, this intervention is seen as unhealthy. Petronas, as a professional international company, needs to be more independent, and better governance of the entire management of the country’s oil and gas resources is much needed.
Over the long term, the government also needs to practise greater transparency and openness in engaging with the public. Already there are calls for the government to make an official statement on how lower oil prices will affect the budget (both in terms of deficit figures and overall spending abilities).
On its part, Ideas is launching the Open Budget Index 2015 in the middle of this year, which evaluates how transparent and well-governed the government budget is — along with the entire budgetary process — in comparison with other countries around the world.
It is also imperative for the Ministry of Finance to come up with various possible oil price scenarios. If prices continue to fall and there is a need to restructure Budget 2015 based on these changes, then so be it.
This would send a positive sign to the investing community, as the government explores how the fluctuating oil prices will affect the budget and the economy and what strategies can be employed to deal with the situation.
Tricia Yeoh is chief operating officer of the Institute for Democracy and Economic Affairs
This article first appeared in Forum, The Edge Malaysia Weekly, on January 12 - 18, 2015.