Govt may review Labuan status and auction off spectrum to raise revenue
THE Government is toying with the idea of introducing several major reform measures in its recalibrated Budget 2016 next week, sources tell StarBizWeek.
Among them are a new round of spectrum auctions and an abolishment of Labuan’s status as a duty-free zone.
A debate is also simmering if the government should reduce the relief on RON95 as petrol is a consumption item and consumers should be taxed.
Having prospered from more than a decade of strong growth thanks to high crude prices, oil-dependent economies such as Malaysia will have to readjust expectations due to plummeting prices since last year.
With Brent crude trading below US$30 a barrel, oil producers around the world including Malaysia are coping with the realities of cheap oil. Countries that derive a large proportion of its revenue from oil and gas are now scrambling to find new revenue sources to offset the shortfall.
The problem is especially acute for countries with budget deficits. To give an example, in a bid to ensure that its budget deficit does not widen, Saudi Arabia recently resorted to raising oil prices for local consumers as well as mulling over the listing of Saudi Aramco, the country’s national oil production firm.
In Malaysia, Petroliam Nasional Bhd (Petronas) has signalled immediate measures to cut costs in expectation of prolonged low prices. Aside from cutting capex by as much as RM50bil over the next four years, the oil giant is considering the retrenchment of some of its 51,000-strong workforce, according to Reuters.
The oil giant pays tens of billions of ringgit in dividends to the Government every year. Between 2008 and 2014, when oil prices were booming, annual dividends to the Government averaged some RM30bil per year.
In a Jan 19 note, Affin Hwang Research forecasts that the Government’s total oil related revenue this year will amount to just RM26.4bil after assuming an oil price of US$30 per barrel.
From this figure, some RM16bil would come from Petronas dividends, a major reduction from previous years.
According to analysts, the volatility present in crude oil prices currently makes it difficult for governments to estimate their petroleum revenue on a per barrel basis.
Some say that prices will recover gradually as the current supply-demand imbalance is slowly being rectified.
“In our view, continued strong demand, along with production curtailment in the US shale segment and elsewhere, will result in a gradual reduction of inventory in the second half of this year, leading to an improvement in crude prices,” says Credit Suisse’s co-head of global oil and gas equity research David Hewitt.
The firm forecasts crude oil prices to recover to around US$60 per barrel by the year 2020 based on current fundamentals, which is still far below prices of US$100 per barrel as recently as September 2014.
On the other hand, a steady increase in the government’s operating expenditure (opex) in recent years means that revenue collection also needs to be increased every year. The high opex also is a built-in cost for the Government and can prove difficult to cut substantially.
Opex has ballooned from RM153.5bil in 2008 to RM215.22bil this year based on Budget 2016’s initial estimates.
Another substantial issue faced by the Government is the rise in contingent liabilities over the past few years.
These are liabilities incurred by firms that are government-backed. Some of the debts are considered as off-balance sheet items, but the backing provided makes them part of the Government’s overall financial obligations.
The rise in contingent liabilities is a by-product of state-owned enterprises participating in government-led investment programmes.
These include, but are not limited to, bonds issued to finance major infrastructure projects.
Since 2012, total debts guaranteed by the Government has grown by 34% from RM129.55bil to RM174.05bil as at Sept 30, 2015 according to Bank Negara data.
While major catalytic projects are a key pillar of economic growth, the current economic realities may present difficulty for the Government to take on more debts in its balance sheet.
Balancing the budget
To be fair, while Malaysia has consistently run a budget deficit every year since the 1997-98 Asian financial crisis, the budget deficit has shrunk steadily from 6.7% in 2009 to an estimated 3.2% in 2015.
Over the same period, Brent crude prices increased from US$40 per barrel in 2009 to a peak of US$126 in March 2012 before recording a steep decline throughout last year.
Nevertheless, the budget deficit has remained despite the strong recovery in the Malaysian economy since the 2008 global financial crisis.
Affin Hwang Investment Bank chief economist Alan Tan maintains that meeting the revenue shortfall is not the only main priority for the recalibrated Budget 2016.
Affin Hwang is forecasting the Government will slash up to RM4.4bil from its operating expenditure and a further RM1bil from its development expenditure.
Nevertheless, Tan believes the Government will strive to maintain its current fiscal deficit target of 3.1% despite the changes in the budget.
“Aside from trimming expenditure components, the Government also needs to introduce new pro-growth measures to stimulate investments as well as consumption.
“We do not see oil revenue as the main revenue driver going forward, so there is a need to ensure fiscal sustainability over the next several years,” he says.
The introduction of the goods and services tax (GST) last year was the first major step in ensuring a more diversified revenue source. An estimated RM27bil was collected in 2015 while a further RM39bil in earnings will be collected from GST this year, says Tan.
Malaysia Rating Corp chief economist Nor Zahidi Alias concurs, adding that the Government remains committed in its efforts to consolidate its fiscal position going forward.
“The GST revenue represents more than a 100% increase when compared to the average collection under the sales and services tax (SST) in 2014 of RM17bil. As such, oil-related revenue as a percentage of total government revenue is expected to decline to less than 20% this year from as high as 40% in the past.”
Malaysian Institute of Economic Research executive director Dr Zakariah Abdul Rashid has touted the implementation of GST last year as timely and fortuitous in balancing the budget.
“Everybody has to face the fact that we have a slower growth environment. If the Government wants to maintain high GDP growth, we need to spend more money despite lower revenue,” says Zakaria, adding that he believes the additional GST contributions this year may not be enough to offset the earnings lost from lower oil revenue.
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