KUALA LUMPUR: The government is expected to undertake measures to ensure that the country’s fiscal deficit will not worsen in 2015 due to the fall in crude oil prices.
Under 2015 Budget, the government said it planned to reduce fiscal deficit to three per cent of the gross domestic product (GDP) next year.
In a research note, RHB Research said the government has a few options to help mitigate the fall in crude oil prices.
It said one of them was to request Petroliam Nasional Bhd (Petronas) to pay a slightly higher dividend of RM20.3 billion (based on a 30 per cent drop in crude oil prices), to help it tide over the difficult period.
Petronas has warned of a lower dividend next year as its net profit for the third quarter ended Sept 30, 2014 fell 12.3 per cent to RM15 billion on weaker oil prices, liquefied natural gas sales and unfavourable foreign exchange.
RHB Research said the government’s revenue will, however, get a lift when the Goods and Services Tax’s (GST) impact would be felt more significantly in 2016.
It said the government has estimated the GST revenue for 2015 of RM23.2 billion.
This, however, will be offset by revenue foregone from the abolishment of the sales and services tax of RM13.8 billion, it said.
RHB Research said the government could miss its fiscal deficit target next year if Petronas did not pay higher dividend.
“The government will have to work within its means by using contingent money and cut its development expenditure by RM3 billion.
“However, the deficit could still improve to between 3.1 per cent and 3.2 per cent in 2015, based on a 30 per cent drop in oil revenue, from 3.5 per cent of GDP estimated for 2014,” it said.
It said if the government were to miss its budget deficit target, the rating agencies were unlikely to downgrade Malaysia’s credit rating.
“This is because the budget deficit is still on an improving trend,” it said.
The research firm said the real GDP would grow by five per cent in 2015, weaker than its earlier projection of 5.3 per cent and compared to an estimate of 5.8 per cent in 2014.
Domestic demand will sustain its growth at around 5.3 per cent in 2015, albeit slower than 5.7 per cent estimated for 2014, from 7.4 per cent in 2013, it said.
Senior economist of The Netherlands-based ABN AMRO Bank NV, Arjen van Dijkhuizen, said the fall in oil prices will add further risks and make it much tougher for the government to achieve its target of reducing the budget deficit to below three per cent of GDP next year.
The bank expects Brent crude oil prices to average US$87.50 per barrel in 2015, compared to an average of around US$100 in 2014.
“For 2015, it will be interesting to see how Malaysia will fare with oil prices at lower levels.
“Crude oil extraction contributes around one-sixth to total economic production and more than 10 per cent of exports,” van Dijkhuizen told Bernama.
He said the biggest challenge for 2015 was how Malaysia and the ringgit will perform under the faster-than-expected interest rate increases in the US, given the country’s relatively weak fiscal indicators and the negative effects of lower oil prices.
“It is likely that Bank Negara Malaysia will have to increase policy rates somewhat next year,” he said.
van Dijkhuizen said the anticipated increases by the US Federal Reserve System might put additional pressure on the ringgit and this will strengthen the need for a precautionary rate increase.
UBS AG said while things may get worse before they get better, oil and capital flows could become more ringgit-positive later in 2015.
“The weakness in the ringgit is likely to be based on a combination of the stronger US dollar and the lower oil price on top of already slowing growth momentum –- implying weak growth and lower policy interest rates,” it said in a note.
Against the backdrop, UBS said, it expected the US dollar to continue appreciating in 2015 and towards euro at 1.15-level and Malaysia’s domestic credit cycle to further mature alongside that of Asia.
“As such, we forecast the ringgit to regain some of its poise, but not to reverse recent losses. We project US dollar/ringgit at 3.50-level for end-2015,” it said. – Bernama