Fiscal deficit challenge


  • Business
  • Thursday, 10 Dec 2015

Alliance Research chief economist Manokaran Mottain said the 2016 fiscal deficit target of 3.1% could be hard to achieve if the oil price remains low.

PETALING JAYA: Malaysia’s target of having a fiscal deficit of 3.1% would be challenging and a possible revision to Budget 2016 could happen should oil prices continue to hover at current levels of about US$40 per barrel, according to economists.

These concerns have cropped up because the federal government had assumed Brent crude to be at US$48 per barrel when it unveiled Budget 2016, while the outlook for oil prices was negative based on the current international scenario. Brent’s current price of US$40.75 is 15% below the budget’s estimates.

Alliance Research chief economist Manokaran Mottain said the 2016 fiscal deficit target of 3.1% could be hard to achieve if the price remains low.

“But this is not something to panic about because the Government has been prudent by assuming an average of US$48 per barrel for Brent crude next year, which is not far off. If it was targeting US$60 a barrel, then it would be something to be worried about,” he said.

Meanwhile, independent economist Lee Heng Guie said the risk of another budget revision “is there” if oil prices were to plummet further.

“If there are negative implications on revenue, then the Government will do it.”

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias, meanwhile, said a budget revision would depend on whether the oil price could stay at its current level.

“Short-term price volatility is unlikely to induce the Government to rush to review its budget. It is the average price that matters, not short-term price variations. However, I think the Government will keep a very close watch on its future trend over the next one month or so to see whether the current level is sustainable.

“Currently, the main reason for the downward pressure on oil prices is the ample supply caused by the Organisation of the Petroleum Exporting Countries’ (Opec) recent decision of not limiting its output and strong production of non-Opec members,” he said.

On Tuesday, oil prices dived close to a seven-year low of US$37.51 for Nymex WTI Crude, while Brent crude oil traded at US$40.26 per barrel following Opec’s meeting last week that did not come up with any solution to tackle the global oil glut. It was reported that Saudi Arabia and Iran, the two biggest members of the organisation, could not come up with a decision to cut production.

Opec said it would keep pumping 31.5 million barrels a day after a meeting in Vienna last week.

The glut in the market, largely contributed by the boom in production of shale oil and gas from the United States, has slashed prices down from its peak of US$115 per barrel for Brent crude in June last year to the current levels of close to US$40 per barrel.

Economists are not expecting the recent slide in oil prices to last long as they feel the global economy will recover next year and drive up demand for the commodity.

Manokaran expects the global economy to be more buoyant in the second half of next year, which would drive the demand for oil, especially from China and India.

“We should have some sort of stabilisation on the global front,” he said.

Malaysia University of Science and Technology Business Faculty dean Yeah Kim Leng said the Government would further enforce its subsidy rationalisation programme and would need to look at other areas of savings to offset any earnings shortfall due to the plunge in the oil price before considering revising its budget.

“The Government might also need to adjust its fiscal deficit target,” he said.

Nonetheless, Yeah said the Government might achieve its 3.2% fiscal deficit target for this year.

“This is because the higher collection of the goods and services tax (GST) for this year would be able to cover the shortfall in oil revenue,” he said.

Notably, income from oil-related revenue such as taxes and dividends from national oil company Petroliam Nasional Bhd (Petronas) made up 22% of the federal government revenue last year.

For next year, Petronas has agreed to give RM16bil as its dividend commitment to the Government based on the oil price of US$48 per barrel. The amount is RM10bil lower compared to the RM26bil committed this year.

Lee said that the Government could continue with other rationalisation measures if the oil price drops to low levels.

“Going into 2016, if there is significant slowdown in consumption, it could affect the Government’s GST collection and it would need to look at other areas of savings.

“Furthermore, the Government’s budget deficit target of 3.1% in 2016 is just shy of its estimated 3.2% this year. So, room for manoeuvring is limited. As oil is a huge variable for the Government, it will look to other measures to improve its revenue.”

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