IF YOU ARE WORRIED ABOUT MALAYSIAS ECONOMY OUTLOOK FOR 2015, YOU ARE NOT ALONE….IM TOO WORRY ABOUT IT. PLEASE TO SHARE WITH YOU THE FOLLOWING ARTICLE. Business News Revisiting the national budget Saturday, 17 January 2015 By: CECILIA KOK Budget 2015 was formulated based on a global oil price assumption of US100-US105 per barrel and expectations of higher tax revenue. Budget 2015 was formulated based on a global oil price assumption of US100-US105 per barrel and expectations of higher tax revenue. WHAT a difference three months make. When Prime Minister Datuk Seri Najib Tun Razak tabled Malaysia’s Budget 2015 last Oct 10, global crude oil prices were still hovering around US$90 per barrel, down by only about 22% from the 2014 peak of US$115 per barrel in June. Who would have thought then that the prices of the strategic commodity would continue to fall so fast, so hard and so sudden. With pressure mounting in the face of declining oil prices and overall moderation of economic activity, the Government is now looking set to make some adjustments to its current fiscal plan and announce mitigating measures to assuage public and investor concerns over the state of the country’s economy. In the week ahead, Najib will be issuing a “full statement” on the Government’s reassessment of the current economic condition and a revised Budget 2015. To many observers, the move shows that the Government is finally coming to terms with the current reality. “Guidance on a review of Budget 2015 is crucial as it will help to ease market concerns,” independent economist Lee Heng Guie points out. “As it is, there’s no telling where the bottom for oil is,” he says. By now, global crude oil prices have already declined by almost 60% from the middle of last year to trade below US$50 per barrel. Brent crude oil, which is an international benchmark, for instance, is currently priced at around US$49 per barrel. Herein lies the pain for Malaysia: Oil is a major source of revenue for the Government. The oil and gas sector is also one of the key growth drivers for the country’s economy. Such sharp decline in global crude oil prices will, therefore, have a negative impact on the commodity-rich nation through loss of revenue for the Government as well as slower investment activities and lower net-export income – both of which could constrain the country’s economic growth. Reality check Budget 2015 was formulated based on a global oil price assumption of US$100-US$105 per barrel and expectations of higher tax revenue, especially with the implementation of the goods and services tax (GST) come April. With these assumptions, the Government had projected a total income of RM235.2bil to run and develop the country at a total expenditure of RM273.9bil. The target is to grow the economy, or gross domestic product (GDP), by 5% to 6%, and trim the fiscal deficit to 3% of GDP by end-2015. Many, however, have started to see Budget 2015 as unrealistic, as they expect the Government’s projected income to come in lower than expected because of the sharp decline in oil prices. Unsurprisingly, it has not gone down well with many market observers, including former Prime Minister Tun Dr Mahathir Mohamad, who says the Government has been not been quick enough to respond to the change in economic conditions. Recent official documents sighted by StarBizWeek will perhaps explain the reason for the Government’s “seeming inaction”. An analysis by a government agency finds that the decline in oil prices has “fairly limited” impact on the country’s fiscal position in 2015 as the national oil company Petroliam Nasional Bhd (Petronas) is still expected to contribute a dividend of RM27bil to the Government this year, given that the 2014 average oil prices remained strong at around US$100 per barrel. On top of that, it notes, the weaker ringgit should also provide some positive effects. Data from the US Energy Information Administration (EIA) show that Brent crude oil prices averaged US$99 per barrel in 2014, down from US$108 per barrel in the preceding year. The government agency, however, concedes that if global oil prices were to stay low longer, the impact on the Government’s fiscal position would be more pronounced in 2016. Its quick calculation shows a possible decline of up to RM5bil in revenue next year if global oil prices were to average at US$80 per barrel in 2014 and 2015. EIA forecasts the prices of a barrel of Brent crude oil will average US$58 this year and US$75 in 2016. Undoubtedly, the recent oil price rout has significantly changed the global economic environment. Economists, therefore, sees that it is only fair to expect the Government to revise Budget 2015 to reflect the present reality. Fiscal deficit target Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias, for one, thinks the new projections on revenue will have to take into consideration the current trend of crude oil prices, which may drag on until at least the first half of 2015, judging by recent demand and supply conditions. “Against such a backdrop, expenditures will also have to be adjusted if the fiscal deficit target is to be maintained at a relatively favourable level,” he says. RAM Holdings Bhd head of research Kristina Fong concurs, stressing that the country’s budget has to be revised based on current oil-price trends for fiscal deficit management and prudence. “The danger of leaving the budget as-is is that the reduced revenue will come in significantly lower than budgeted, and with the same amount of planned expenditure, the Government would run up a deficit larger than the target of 3% to GDP this year,” she explains, noting that a lot of conditions have changed since the tabling of Budget 2015 three months ago. These include the scrapping of the fuel-subsidy scheme, effective Dec 1, 2014 – a move that could help ease pressure on government spending, but has yet to be accounted for in Budget 2015. In addition, the unprecedented floods that hit several states in Malaysia last month will inevitably incur unexpected expenses for the Government. According to Hong Leong Investment Bank (HLIB) economist Sia Ket Ee, the Government will likely need to fork out an additional RM1.5bil for the flood reconstruction and rehabilitation programmes for the affected states on top of the RM1bil already budgeted for flood-mitigation plans this year. In his research note, Sia states the new allocation will likely comprise RM500mil as cash handouts for affected households and RM1bil for rebuilding works. Fiscal discipline The persistently soft global oil prices and an uncertain world economic outlook leave a tough choice for the Government to make. Sticking to its fiscal consolidation plan will send strong signals of the Government’s determination to implement market-friendly reforms. But such initiative, which may involve expenditure cuts to ensure that the fiscal-deficit target is met, could come at the expense of the country’s economic growth. But choosing not to cut down on its expenses, while it may help support Malaysia’s already-slowing economy, will cause the government budget shortfall to widen. This will put the country in an unfavourable light among investors and financial analysts. The concern is that the ringgit, battered by lower oil prices, will further suffer if that happens. The consensus view among economists is that it is more crucial for the Government to stay on the fiscal consolidation track despite the downside risk to growth than to deviate from this critical reform. As it is, Fitch Ratings has put Malaysia’s sovereign credit-rating outlook on a negative watch since July 2013 due to the country’s long-standing fiscal deficit and perceivably slow reforms. The international rating agency’s latest assessment lumps Malaysia and Mongolia as the only two out of the 10 Asia-Pacific countries it monitors with a negative outlook. Most economists expect the Government to maintain the fiscal deficit target of 3% of GDP under the revised Budget 2015. They believe there will be a change in government spending priorities and this will likely involve trimming down the allocations for both operating and development expenditure. On this note, some expect the Government to officially revise downwards its GDP growth forecast for Malaysia under the revised Budget 2015. HLIB, for instance, expects the new 2015 GDP forecast to range at 4.5%-5.5%, down from the original 5%-6% range. Indeed, the reversal of the commodity surpercycle has put Malaysia in a challenging phase. It will need strong resolve to implement deep-rooted reforms, which include tackling leakages and corruption, to put the country’s economy on a stronger path. With only five more years left for the nation to achieve its dream to become a developed nation, there’s really no time to waste.
Posted on: Sat, 17 Jan 2015 18:53:40 +0000
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