By Sherilyn Goh
The government is expected to exercise further fiscal prudence through the introduction of more cuts in indirect subsidies and price support for a range of goods in coming months, in order to meet its 2016 fiscal deficit target of 3.1% of gross domestic product (GDP) should the current oil rout persists, according to Kenanga Research.
“Going by the rate that oil prices are falling, the federal government’s 2016 fiscal deficit target of 3.1% of GDP at this stage looks a bit shaky but not entirely unachievable,” noted Kenanga Research in its report published today.
While higher revenue from the goods and services tax (GST) collection is likely to make up for the shortfall in the oil revenue, Kenanga was quick to point out that further fiscal prudence is necessary to curtail growth in operating expenditure.
It further lauded the government’s move in eliminating indirect subsidies and price support for a range of goods ranging from low-grade rice to highway tolls, public transport fares and electricity tariffs, which it cited as “inefficient and a waste of public funds” on a macro level. It therefore expects more of such cuts in coming months.
In 2016, Kenanga expects the income effect of the sharp reduction in foreign exchange to linger. Government finances, it said, will be put under pressure as it struggles to meet its 2016 fiscal deficit target of 3.1% of GDP – down from 3.2% last year – which is dependent upon GDP growth at and above 4.5% and oil prices averaging US$48 per barrel.
“A lower average crude oil price of US$40 could reduce 2016 oil and gas revenue by up to 20% according to our estimates. In this scenario, the shortfall could be plugged by higher dividend payments from government-linked companies and a reduction in development expenditure though this will only provide a stopgap solution,” it explained.
GST induced inflation to peak in 1Q16
While inflation appears to have eased during the second half of 2015 (2H15), Kenanga Research said the one-off increase in prices will be most felt in the first quarter of 2016 (1Q16), when headline inflation is expected to peak to 4.0% y-o-y.
This, it said, is due to a combination of factors including the residual cost pass-through from the implementation of GST in 2Q15, low-base effect from unusually low inflation in 1Q15, and imported inflation due to the sharp depreciation in the ringgit, albeit the latter is somewhat mitigated by decline in global food and producer prices.
With this, private consumption continues to lag on consumer and business pessimism, exacerbated by delayed income effect from the commodities rout and GST implementation.
“Although we see private consumption growth improving from a 3Q15 low, we are expecting only a limited rebound in 2016,” it said.
After stable growth averaging 7.3% y-o-y in the years after the Global Financial Crisis, private consumption growth fell to a near six-year low of 4.1% in 3Q15.
The slowdown was more than expected for the second reporting quarter following GST implementation but followed stronger-than-expected growth in private consumption in 2Q15, the first quarter following GST implementation.
Separately, the quarterly growth in GDP is forecast to come in at 4.9% y-o-y in 1Q16, breaking the moderating growth trend which has persisted since mid-2014, according to Kenanga Research.
The research house forecasts 2016 full-year GDP growth to come in at a modest 5.1%, slightly better than 2015 growth, which is now expected at 4.9% after a downward revision amid the rout in oil and commodity prices which has lasted for more than a year now.
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