Highlight Malaysia to unveil policy changes Tuesday as oil earnings slide

by **Cals** Mon 19 Jan 2015, 23:50

Highlight
Malaysia to unveil policy changes Tuesday as oil earnings slide

By Reuters / Reuters | January 19, 2015 : 6:30 PM MYT

KUALA LUMPUR (Jan 19): Malaysian Prime Minister Najib Razak will announce policy changes, including likely budget revisions, on Tuesday to help its oil exporting economy adjust to the impact of slumping global crude prices.

Southeast Asia's third largest economy relies on oil and gas export revenues to maintain strong growth and control a mountain of debt, and the adverse turn in the crude market has put its current account balance under strain, and ruined budget projections.

A 10 percent fall in the ringgit currency during the past four months reflects investors' mounting worries, as the government's budget for 2015 was based on overoptimistic forecasts for oil prices and economic expansion.

Quoted by state-run Bernama news agency on Monday, Najib flagged the need for change to meet the more straitened times.

"An accurate and wise approach is necessary to mitigate the effects of the oil price slump on economic growth, national revenue and the value of the ringgit," Najib said.

Bernama reported that he would announce "economic modifications and interventions" on Tuesday. A government official told Reuters that Najib, who also runs the finance ministry, was also likely to announce a revised 2015 budget.

The country's 2015 budget, tabled in October 2014, was presented with the assumption that oil prices would have kept to $100 a barrel, whereas the price of Brent crude has fallen by more than half.

Aside from the impact a plunging oil market, Malaysia is also feeling the chill from slowing economic growth in China, the second-largest export market.

A budget revision could help assuage investors' concerns, if it commits reducing its fiscal deficit by cutting spending to counter the loss of revenues from the commodities sector.

Malaysia's stock market fell 3.8 percent over the past year, taking its biggest hit in December when the decline in oil prices became more acute. Its government bond market could see further sell off as foreign investors hold 46 percent of the country's bonds.

The Malaysian ringgit was emerging Asia's worst performing currency in 2014, and having lost 1.9 percent since the start of this year it still holds that unwanted ranking.

OIL ECONOMY

The decline in oil prices has hit Malaysia's state oil firm Petronas, which accounts for most of the government's oil and gas revenue. The company warned in November that payments to the government in the form of dividends, tax and royalties could be 37 percent lower next year if oil stays around $75 a barrel..

"Petronas will make capital expenditure deferments and reductions in operational expenditure in response to the recent steep 60 percent decline in oil prices," it said in a statement on Sunday night.

Analysts were uncertain how far Najib would change policies, but expected him to reaffirm commitment to bringing down the fiscal deficit.

"It's a tough balancing act but the preference would be to try to stick to their fiscal target as much as they can," said Euben Paracuelles, economist at Nomura Holdings.

Malaysia's fiscal deficit target for 2015 is 3 percent of gross domestic product, reduced from a target of 3.5 percent for 2014.

The government is likely to hold on to its 3 percent fiscal deficit target by using savings derived from the elimination of fuel subsidies and earnings gained from a consumer tax set to be introduced in April.

The goods and services tax (GST), is set at 6 percent and is expected to bring in a revenue of 23 billion ringgit this year.

"This offers a buffer and flexibility for the non-essentials in terms of operating expenditure. It's still possible for them to get 3 percent," said Paracuelles, adding that the government risks a ratings downgrade if its fiscal deficit goes beyond 4 percent.

Analysts believe the government needs to reduce its growth forecast, as an unrealistic assumption will lead a sharp rise in Malaysia's debt to GDP ratio.

The government has forecast a 5.0 to 6.0 percent growth for this year, whereas market forecasts are for around 4.0 percent growth.

"Najib may hint that a five to six percent growth may not be achievable in part of the global oil price plunge but it's likely the official figure would only be released in March," said Paracuelles.