Prime Minister Najib Abdul Razak’s fiscal targets are under siege for a second year as an oil rout forces a reassessment of public spending plans to keep the Malaysian budget from being busted.
The budget gap may be as high as 4 percent of gross domestic product (GDP) compared with a target of 3.1 percent if there are no changes to current expenditure plans, according to analyst estimates compiled by Bloomberg .
Najib will announce cuts to operating expenditure and revisions in growth forecasts on Jan 28, a Finance Ministry official said yesterday.
The start of 2016 is shaping out to be a continuation of turmoil that plagued Malaysia last year when foreign investors unloaded US$7 billion (RM30.77 billion) of equities and bonds. Any deterioration in the deficit puts Malaysia at greater risk in the event of another exodus of capital from emerging markets, which began the year jolted by China.
"If the amount of money you take in is significantly dependent on something as volatile as oil, it is hard to sleep soundly," said Wellian Wiranto, an economist at OCBC in Singapore.
"As revenue shortfall from oil grows and grows, there is only one way to go: cut expenditures more and more if the deficit target is sacrosanct," he pointed out.
Economists say spending cuts would weigh on expansion, with Malaysian exporters also facing headwinds from a China slowdown and a weakening yuan. The ringgit is among the worst performers in Asia as crude dropped to a 12-year low and uncertainty over China rattles global markets.
Malaysia - as Asia’s only major net oil exporter - risks losing RM300 million for every US$1 per barrel drop, according to government estimates. Moody’s Investors Service cut its positive outlook on the sovereign this week, while state oil company Petroliam Nasional Bhd (Petronas) said crude could average US$30 (RM131.88) a barrel this year.
Najib’s plan to balance the budget by 2020 has resulted in subsidy cuts, a new consumption levy and higher taxes on the wealthy. Those efforts have been undermined by lower commodity prices, while a weaker global economy has hurt exports.
Economists are divided on whether the premier will choose to cut development or operating expenditure, or revise the deficit target. In 2015, he reduced operating spending and changed the deficit target to 3.2 percent of GDP from 3 percent.
‘Optimistic’ projections
“Malaysia faces a year of reckoning,” said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch.
"Revenue projections are overly optimistic, particularly oil-related revenue and corporate tax revenue. Companies will face much tougher business conditions this year," Chua noted.
Najib last week reiterated a commitment to cut the deficit even with oil trading close to 40 percent below the budget assumption of US$48 (RM211) a barrel. The pledge to fiscal discipline is needed to bolster investor confidence, said Krystal Tan of Capital Economics Ltd.
"Failure to do so could leave Malaysia facing ratings downgrades and vulnerable to negative turns in investor sentiment, especially given the high level of foreign ownership of Malaysian government debt," she said.
Measures to cut spending will include the government studying the privatisation of projects, Finance Ministry top bureaucrat Mohd Irwan Serigar Abdullah said yesterday.
The Inland Revenue Board and the Royal Malaysian Customs Department are also reported to be looking at ways to maximize revenue as Najib faces constraints in introducing new measures to boost government coffers.
“He has expended considerable political capital to push through the goods and services tax (GST), raise toll fees, and cut government expenditure for 2016,” said Chia Shuhui, an Asia analyst at BMI Research in Singapore.
"Najib might decide to trim development expenditure instead, which could result in a slowing of the government’s planned development projects aimed at laying the foundation for future growth," Chia added.
- Bloomberg
