Friday 29 Mar 2024
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KUALA LUMPUR: Malaysia is set to miss its fiscal deficit target of 3% of gross domestic product (GDP) this year, with the oil price at US$50 (RM179) per barrel, said Morgan Stanley Research.

In a report on “What’s in Store for 2015?”, Morgan Stanley yesterday said despite Malaysia’s fuel subsidy rationalisation, its fiscal balance is likely to be negatively affected by at least a net -1.3% of GDP as Malaysia is an oil and gas (O&G) net exporter.

“This raises the risks that policymakers would need to cut back on expenditure or increase revenue elsewhere to stay on the fiscal consolidation track, posing a double-whammy for the economy,” it said.

“On the monetary front, disinflation coupled with downside growth risks would increase the likelihood of Bank Negara Malaysia easing and the currency, which is historically correlated with oil prices, has already borne the brunt of the negative terms-of-trade shock,” it said.

Morgan Stanley noted that fundamentally, the falling oil price compounds the Dutch disease problem that Malaysia was already facing with the reversal of the commodity supercycle. (The Dutch disease refers to the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves.)

“Currency depreciation is a near-term solution to restore competitiveness. However, structural reform measures to address the quality of human capital would be the only sustainable panacea to offset the growth impact from lower commodity prices,” said the research firm.

“Indeed, growth momentum in mega investment plans such as the Economic Transformation Programme and the Iskandar Development Region can only have longevity if policymakers implement a critical mass of reforms to improve “soft infrastructure”, that is, human capital,” it added.

 

This article first appeared in The Edge Financial Daily, on January 15, 2015.

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