Economist warns of wider fiscal deficit if oil price drops

KUALA LUMPUR: A chief economic researcher has warned of a possibly wider fiscal deficit should the global Brent crude oil price dip below US$70 a barrel.

Kenanga Investment Bank Bhd’s Wan Suhaimie Wan Mohd Saidie said while he was sure basing the budget on the crude oil price of US$70 was a one-off thing, he had carried out a sensitivity analysis on oil prices.

“Let us say we do not achieve a target global oil price of between US$60 and US$70, the deficit will be bigger.

“There is the possibility the oil prices will drop below US$70 per barrel and the budget deficit will be slightly wider, about 3.6% and 3.9% of the gross domestic product (GDP),” he said in his presentation at the post-budget debate organised by the Malaysian Economic Association here today.

Also present were the finance ministry’s national budget director Johan Mahmood Merican, Malaysian Economic Association (MEA) president Norma Mansor, Sovereign Ratings S&P Global (Ratings) director Andrew Wood, Universiti Kebangsaan Malaysia vice-chancellor Noor Azlan Ghazali, and the finance ministry’s deputy under secretary (fiscal and economics division) Mohd Hassan Ahmad.

Wan Suhaimie said a strong US dollar could also add pressure on oil prices and when oil prices go up, the prices of commodities will come down.

The Budget 2019 allocation tabled last Friday by Finance Minister Lim Guan Eng was based on the average crude oil price of US$70 per barrel.

Former prime minister Najib Razak had previously cautioned the Pakatan Harapan (PH) government against formulating and announcing its Budget 2019 based on the Brent crude oil price of US$70.

Najib said the previous Barisan Nasional (BN) government had tabled its budget for the year based on the crude oil price of US$52.

“I wish to remind the current government that the global crude oil price is too volatile. Whether it will go up or down, nobody can tell. This is because of geopolitical factors nobody can predict.

“The current situation is quite fragile, hence the government should not set its figures based on the pricing of US$70 a barrel,” he said when debating the mid-term review of the 11th Malaysia Plan in the Dewan Rakyat.

Wan Suhaimie also expressed reservations about having the oil revenue at 30% of the total revenue, saying it was a bit too much.

“I think the best level for the oil ratio to GDP is between 20% and 25%. Anything above 30% is risky, to be over-dependent on oil,” he said.

Wan Suhaimie also stated that his forecast for Budget 2019 was more on the challenging side. He said while he was of the view that the government would be able to achieve a 3.7% fiscal deficit this year, he was a bit more sceptical of next year’s target of 3.4%.

“I think 3.4% for next year is a bit challenging given the fact that the global economy is slowing down and that will affect the overall outlook of the deficit. I see (next year’s deficit) at 3.5%,” he said.

Wan Suhaimie also welcomed the move by the government to pay back the goods and services tax (GST) refunds, along with income tax refunds in the coming year.

“I think it is a good thing. Initially, I thought it would be spread out over five years. But the government is biting the bullet, enduring the pain and hence the country can enjoy faster recovery over the next few years,” he added.

Source: FMT