By G. Sharmila
Abdul Wahid Omar
Budget 2016 was tabled in Parliament last October and based on a Brent crude oil price projection of US$48 a barrel. The Budget had projected that oil and gas-related revenue would be 14.1% of total revenue in 2016, from 19.7% in 2015. However, since mid-December, Brent crude oil has been trading at under US$40 a barrel.
In mid-December, Minister in the Prime Minister’s Department Abdul Wahid Omar hinted at a possible Budget 2016 review. Since then, speculation has been rife that a review will indeed happen that will lead to budget cuts, which will in turn impact specific sectors and companies.
Johari Abdul Ghani
For now, it appears that the Budget will remain as is. On Dec 30, Deputy Finance Minister Johari Abdul Ghani said that the government will not make any revision to Budget 2016 now despite declining oil prices. According to a Bernama report on the same date, even if oil prices were to fall below US$30 per barrel, Johari said the government would tweak its spending to mitigate the need to adjust the national budget.
However, he did not rule out a budget review completely and experts KINIBIZ spoke to seemed to be of the opinion that a review will eventually take place.
Manu Bhaskaran
Manu Bhaskaran, chief executive officer of Centennial Asia Advisors Pte Ltd, an independent research and advisory firm based in Singapore, believes that a budget review is likely given that oil prices, and therefore the revenue, are much lower than in the original budget.
“So either more revenue has to be found or expenditures be cut or a larger fiscal deficit tolerated. Probably it will be a combination of these but since there is little leeway to raise revenue nor much room to tolerate a higher deficit, it looks like some spending must be cut. Ideally it should not be capital spending that is cut,” he told KINIBIZ via email.
‘Hard to say’
Rahul Bajoria
Not everyone is certain that a major budget review will happen, however. Barclays Bank Plc regional economist for emerging markets Rahul Bajoria told KINIBIZ over the phone that at the current juncture, it’s hard to say whether there will be a review undertaken.
“I think one of things the government can think about is whether the petroleum tax revenue that they have budgeted for would be undershot. I think that could be a potential stress point coming into 2016, but broadly speaking I would say, the Budget was fairly realistic in terms of the assumptions that they are making in terms of tax revenue, in terms of overall revenue pool and also on the expenditure side.
“So while there could be a bit of review undertaken as far as the underlying assumptions are concerned, I think it is still too early to say whether it will require a major review. It is still not dramatically away from the underlying forecast that the government has factored in, which is US$48 a barrel in their assumptions,” he said.
“I would say that if there is a major review, it would probably be more in the likelihood of the middle of 2016 if oil prices stay where they are right now,” he added.
Will the fiscal deficit inch up?
But what if oil prices were to remain where they are currently? According to Rahul, if they do, he thinks the fiscal deficit may go up a bit compared to the projections that the government are given, which is about 3.1% of the gross domestic product (GDP).
“But it is not going to dramatically different I would think because on the other hand you do have a fair amount of revenue coming from the goods and services tax (GST) side, so overall I don’t think there will be a dramatic change in the underlying assumptions of the economy, and of the Budget. But I would think that maybe the fiscal deficit may be slightly higher than what they’re currently projecting,” he said.
If the government does not go ahead with the budget review, what else can be done to mitigate lower crude oil prices?
“Malaysia’s position as an oil-exporting country is not very strong in the sense that Malaysia is not a very large exporter of oil. It is a large exporter of natural gas, and prices are benchmarked, there is very little the country can do as far as mitigating the effects of lower oil prices is concerned.
“I think what we have seen is that the government is very focused on trying to ensure that the current account surplus does not decline and it’s also trying to ensure that the fiscal slippage is not very high. If things remain the way they are as far as oil prices are concerned, I think there could be a little more rationalisation of the expenditure from the government side,” he said, adding that he doesn’t see a significant room to cut the expenditure at the current juncture.
GST boost
Rajiv Biswas
Meanwhile, IHS Global Insight Asia-Pacific chief economist Rajiv Biswas noted that while the Malaysian government has signalled that a Budget 2016 review may be necessary, the introduction of GST in April 2015 has significantly reduced Malaysia’s vulnerability and dependence on oil for fiscal revenue.
“Oil-related revenue was already projected in the Budget to decline to 14.1% of total budget revenue in 2016, compared to an estimated 19.7% of revenue in 2015, and as high as 30% of revenue in previous years. Therefore, the impact on the Budget of the recent decline in oil prices has been mitigated by the diversification of Malaysian government revenue since the introduction of GST as well as the removal of fuel subsidies,” he told KINIBIZ via email.
Rajiv believes that if there is a Budget 2016 review, it will assess the impact of lower world oil prices on the Malaysian fiscal outlook. “Since lower oil prices would result in lower fiscal revenues, there might be some measures undertaken to constrain any increase in the fiscal deficit,” he said.
He added that with economic sanctions on Iran expected to be lifted in 2016, Iran has the capacity to add 500,000 to 700,000 barrels per day of oil exports once sanctions are lifted.
“Clearly additional Iranian oil supply into a world oil market that is already in glut could keep downwards pressure on the oil price during 2016. Therefore with the outlook for oil prices to remain weak during 2016, it may be necessary for the Budget to be reviewed to assess the impact of lower oil prices on the fiscal deficit and the medium-term fiscal framework,” he said.
“While lower oil prices will have a negative impact on budget assumptions, the impact of lower oil prices on the Malaysian economy has been significantly mitigated by the depreciation of the ringgit against the US dollar, which has acted as a buffer for earnings in ringgit terms. Other parts of the economy have also benefitted from the ringgit depreciation, notably manufacturing sector exports, with Malaysian manufacturing exports in October recording a 22.2% growth year-on-year,” he concluded.
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