M’sia needs to revise Budget 2015

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SINGAPORE: It is timely for Malaysia to revise its Budget 2015 to account for the rapid decline in crude oil prices, which could potentially stall its fiscal deficit target, said Credit Suisse director and head of Malaysia equity research Tan Ting Min. 

“They [the Malaysian government] definitely have to do a revision because Budget 2015 used an oil price assumption of US$100 (RM357) per barrel. As a result, we think it will be very difficult for them to hit the fiscal deficit target of 3% this year,” Tan told a media briefing on the sidelines of Credit Suisse’s 4th Annual Macro Conference and 6th Annual Asean Conference here yesterday.

The government has trimmed its fiscal deficit to 3.9% of gross domestic product (GDP) in 2013 and is expected to further reduce it to 3.5% in 2014. A slew of rationalisation measures, particularly the removal of the fuel subsidy from Dec 1, 2014, to a managed float system, has eased the pressure on government expenditure. 

Previously, the government had indicated that it intended to have a balanced budget by 2020.

Since Prime Minister Datuk Seri Najib Razak presented Budget 2015 back in October, the Brent crude price has fallen from US$100 to just above US$50 presently. It is worth noting that at present, the government has yet to indicate when and how it intends to have a relook at the country’s projected petroleum earnings, which would amount to far less at present oil prices.

Oil and gas-related income is a backbone of the Malaysian economy as it currently accounts for 30% of the government’s total revenue.

To account for lower petroleum revenue contribution from Petroliam Nasional Bhd (Petronas), an alternative for the government would be to request the state-owned oil major to increase the quantum of its dividend payment this year. Petronas paid the government dividends amounting to RM28 billion in 2012 and RM27 billion in 2013.

“However, there has to be a limit. If oil price stays at US$50 per barrel, you can’t expect Petronas to pay the government the same amount as it did in previous years,” said Tan.

A revision in the national budget is widely expected by observers, especially after Saudi Arabia revised its own oil price assumptions for its budget from US$100 per barrel to US$60 per barrel. After adjusting for lower oil prices, the Saudi government projected a deficit of US$38.6 billion this year.

A further decline in oil prices and a weakening ringgit would both spell lower revenues for the Malaysian government in spite of the substantial savings arising from the removal in oil subsidies.

Tan said the prospect of the government not being able to meet its fiscal deficit reduction target could have serious ramifications for Malaysian equities.

“Malaysia was already one of the worst-performing markets in the region last year. We have started the year with the ringgit weakening further and oil prices have continued to fall, which has certainly dampened investors’ sentiments further,” she said.

However, a silver lining would be that the markets should have factored in the negatives by the second half of this year, she added.

“The market may have factored in some of the downside expectations from lower oil prices, but weaker economic data and the implementation of the goods and services tax in April could mean a rather tricky first half of the year.”

In a Dec 5 strategy note, Credit Suisse said the market was too optimistic about Malaysia’s corporate earnings outlook this year with an expected growth of 9.2% year-on-year. The firm believes that this is unachievable, and is instead projecting negative earnings momentum going forward.

Credit Suisse favours the construction, telecommunications and plantation sectors as the most promising. Its “top buy” recommendation includes Axiata Group Bhd, Gamuda Bhd, Astro Malaysia Holdings Bhd, and Genting Plantations Bhd.

 

This article first appeared in The Edge Financial Daily, on January 9, 2015.