Malaysia can still meet fiscal deficit targets, say economists

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KUALA LUMPUR: Malaysia will still be able to meet its fiscal deficit targets of 3.5% and 3% of gross domestic product (GDP) for 2014 and 2015 respectively despite falling crude oil prices, said economists.

CIMB Research regional economist Julia Goh said it “shouldn’t be a problem” for the government to meet its fiscal deficit targets as oil prices are expected to stay at current levels.

The managed fuel float system to determine prices of RON95 and diesel fuel on a monthly basis will give the government “more fiscal space”, she said.

“We feel that the net impact of declining oil prices on government revenue will be offset by savings from fuel subsidies,” Goh told The Edge Financial Daily yesterday.

The managed float system will be implemented on Dec 1.

Goh estimated that for every US$10 (RM33.50) drop in oil price, there should be a RM2 billion to RM3 billion decline in government revenue. This means that a US$30 drop in oil price will result in RM6 billion to RM9 billion in lost revenue.

“Unless oil prices drop below US$65, this is not expected to impact the government’s ability to meet its fiscal deficit targets,” she said.

Brent crude oil prices steadied around US$80 a barrel yesterday ahead of a key meeting of Organization of Petroleum Exporting Countries oil producers to decide on production levels for next year. Oil prices shed 31% of their value from a high of above US$115 a barrel in June.

“In any case, the savings from the fuel subsidy removal can be channelled [to other areas of the budget],” Goh said, adding that the additional Bantuan Rakyat 1Malaysia (BR1M) expense is not a concern as BR1M’s budgeted amount had been accounted for in Budget 2015.

Alliance Research chief economist Manokaran Mottain concurred, saying the fall in oil revenue will be nullified by the removal of fuel subsidy.

“The shortfall will be taken care of by savings from the fuel subsidy. The RM21 billion allocated for fuel will be more than enough to offset any shortfall,” he told The Edge Financial Daily.

Based on Goh’s and Mottain’s estimates, it can be deduced that the government can gain an additional revenue of RM12 billion to RM15 billion, ceteris paribus.

RHB Research economist Peck Boon Soon said there is room for the government to manoeuvre in order to meet the budget deficit targets despite the low crude oil prices.

“No doubt falling crude oil prices will impact oil revenue, but it also means that it will reduce the amount of subsidy that the government needs to fork out,” he said.

Peck said the implementation of the multi-tier subsidy mechanism will significantly reduce the government’s subsidy burden.

“Worse come to worse, the government can reduce some development spending [in order to meet the fiscal deficit targets] depending on how the situation pans out,” he said, adding that the government has allocated some RM21 billion for fuel subsidy this year.

Peck noted that even if Petroliam Nasional Bhd (Petronas) intends to reduce its dividend ratio, it is possible for the government to “ask” Petronas to maintain its current level of payout.

“Assuming oil prices continue to fall and Petronas [intends] to pay less dividends, the government can still ask the oil major to pay the same [amount of] dividends,” he said, adding that this is only a temporary measure as the goods and services tax revenue has yet to flow in.

Petronas paid RM27 billion in dividends to the government in 2013, RM28 billion in 2012 and around RM30 billion from 2009 to 2011.


This article first appeared in The Edge Financial Daily, on November 26, 2014.