Fiscal deficit to improve to 3.1 pct of GDP this year

KUALA LUMPUR: Affin Hwang Investment Bank Bhd has projected Malaysia’s fiscal deficit to improve 0.1 per cent to 3.1 per cent of Gross Domestic Product (GDP) this year from 3.2 per cent last year on the back of improving global oil prices.

The fiscal deficit was forecasted to further improve to 3.0 per cent in 2017.

The investment bank said global oil prices have recovered strongly since reaching a 12-year low of between US$26 and US$28 per barrel in mid-January 2016 to about US$47 per barrel currently.

It said between January and midJuly, Brent crude averaged around US$42 per barrel, and is likely to remain at around the US$48-US$50 level in the remaining months of 2016, bringing the full-year average to around US$45 per barrel.

“Given that about 14 per cent of the Malaysian government’s revenue for 2016 is likely oil-related, we believe the recovery in oil prices has lifted some pressure on the country’s fiscal position,” it said in a research note today.

The investment bank said back in early January, in response to the lower collection of oil-related revenue, as well as to maintain the fiscal deficit position at 3.1 per cent of GDP, the government had resorted to optimise both the operating expenditure (OPEX) and development expenditure (DE), through cost-cutting in non-critical spending, such as supplies and services.

“The DE was reduced to RM46 billion and RM45 billion on average oil price assumptions of US$35 and US$30 per barrel respectively,” it said.

It said this was done through rescheduling non-physical projects and projects still under study, reducing the cash flow commitment by RM4 billion-RM5 billion, with infrastructure projects with larger multiplier effects to be prioritised and carried out.

“Based on our estimates, with recent oil prices having rebounded to the US$46-US$48 per barrel range, and averaging at around US$42 per barrel (comfortably above US$30US$35 per barrel), the government has some flexibility to increase the DE budget towards RM50 billion,” it said.

However, it said, the government is expected to wait for a clearer economic outlook on Malaysia’s domestic demand, given the recent slowdown in both private consumption and investment, before deciding on reinstating some of the cutback in development expenditure.

It said as there is no urgent need for a higher allocation for development expenditure, if the Malaysian economy continues on its current steady pace, the expected improvement in oil revenue may be necessary to accommodate the slightly higher OPEX.

“For 2016, with allocation in emolument and pension charges, in tandem with salary increases for civil servants, we believe OPEX will be slightly higher than the allocation in the revised Budget, in a similar trend to 2015,” it said. — Bernama