KUALA LUMPUR (Nov 4): Malaysia will still be able to achieve the government's fiscal deficit target of 3.0% of gross domestic product (GDP) in 2015, despite the recent slump in crude oil prices, according to RHB Research Institute.
 
Today, the benchmark Brent crude and West Texas Intermediate fell to US$83.12 and US$77.20 respectively, following Saudi Arabia's reduction in oil price to US customers.

RHB economists Peck Boon Soon and Shafizal Shafaai said the target of 3.0% will 'unlikely be derailed' given that declining oil prices will likely reduce the burden of subsidy for Malaysia, which has turned into a net oil importer since January this year.

"The government forecasts its fuel subsidy for 2014 to reach RM21 billion, lower than RM23.5 billion estimated for 2013. 

"Based on the latest Ministry of Finance's economic report, we estimate that the government's fuel subsidy burden to shrink to about MYR15bn We estimate that the government's fuel subsidy burden to shrink to about RM15 billion," they said in a note today, adding that the government may save about RM2.5 billion in fuel subsidy for every US$10 per barrel reduction in average crude oil prices.
 
The pair said other savings could also come from a reduction in smuggling activities, noting that the government had estimated that it could save about RM5 billion, even after taking into account the leakage through smuggling activities, from the implementation of the targeted fuel scheme and by marking fuel prices at petrol stations to market prices.

The pair noted that the government's oil revenue will inevitably be affected by the weaker global oil prices and it could fall by about 15% or RM8.9 billion, assuming a lower Brent cure oil price of US$85/barrel compared with the government's forecast of USD100/barrel.

But they also noted that the government will be able to adjust its expenditure to make up for any shortfall in oil revenue caused by the lower crude oil prices.

"In a worst case scenario, the government could cut its gross development expenditure, as it has been doing so in the previous years...however, [this] could affect the country's economic growth but we believe it will likely be manageable given that exports will likely improve," they said.

The economists pointed out Petronas may also maintain its dividend payment at RM27 billion, albeit temporarily, to help the government next year.

"This is because the government's revenue will likely improve in 2016, when the full year impact of an implementation of the Goods and Services tax (GST) is felt," they said.
 
Peck and Shafizal also maintained their slower GDP growth forecast of 5.3% next year, as compared to 5.8% this year, and expect real GDP to rise to 5.5% in 2016. 

They also expect inflation to jump significantly to 4.2% next year from an estimated 3.4% this year.