Bracing for tough times ahead

by **Cals** Sun 13 Dec 2015, 22:55

Saturday, 12 December 2015

Bracing for tough times ahead

BY M. SHANMUGAM . . . THE ALTERNATIVE VIEW

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Big oil producer: Iranian oil workers gather at an oil refinery south of the capital Tehran, Iran. The country’s entry into the international market has spooked the oil traders

A YEAR ago, when the price of oil was coming down gradually, The Star’s in-house chartist had predicted that it could average as low as US$32.40 per barrel. Today, that is a reality.
The entry of Iran – the other big oil producer in The Organisation of the Petroleum Exporting Countries or Opec after Saudi Arabia – into the international market next year has spooked the oil traders. According to reports, the traders have continued to bet on a continued decline in oil prices and are holding derivative positions to “sell” forward contracts involving almost 360 million barrels equivalent of oil. That is a near record.
What this means is that oil prices are going to be low for the next few months or a year or more than that. The most optimistic of oil managers are resigned to the price of oil averaging at about US$40 per barrel in the next few months.
Assuming this is the case, it is bad news for Malaysia.

Budget 2016 is premised on the price of Brent crude oil trading at US$48 per barrel. Contribution from oil and gas made up 19.7% of the federal government’s total revenue for 2015 and next year, it is expected to be less.
The federal government has set a target of achieving RM225.7bil in revenue for 2016. Whether this can be achieved is a big question mark.
The Government generally takes into account the average oil price before making any revisions to its Budget 2016 estimates. But looking at the global dynamics of oil prices, there is a high probability of the budget being revised to reflect the latest developments.
Goods and services tax
The best chance for the Government to increase revenue is from the goods and services tax (GST) that makes up some 17% or RM39bil of the total amount going into its coffers.
Unless the tax rate of 6% is revised upwards, which is something that is not going to happen at least until the next general election, the collection from the GST will not increase.
Meanwhile, prices are creeping up and it is going to affect a large number of Malaysians.
Electricity tariffs are going to go up despite the reduction in energy prices such as coal and oil because Malaysia has been receiving subsidised natural gas to fire up the power plants.
Under the subsidy rationalisation programme, Petroliam Nasional Bhd or Petronas is to increase the gas price by RM1.50 every six months.
The subsidy rationalisation programme started when subsidised gas was supplied to the power industry at RM6.20 per million metric British thermal units (MMBtu). That was more than four years ago.Effective Jan 1, the rate supplied to the power industry would be RM18.20 per MMBtu.
Over the years, the price of natural gas supplied has increased by almost 300%. This has translated into higher electricity tariffs for households.
In a random survey among my colleagues, only one has a bill of about RM60 per month. The electricity bill for most of them is above RM200 and these are middle-class wage earners.
Toll rates
Another item that is going to hit the pockets of the middle class next year is toll rates. Next year, PLUS Expressways Bhd is slated to increase its toll rates by 5%. This was part of the agreement when the highway was taken private by a joint venture between UEM Group Bhd and the Employees Provident Fund.
In the case of PLUS, the Government still has a final say on the matter because both entities are owned by it anyway. But it is only a matter of time before the rates go up because the Government has to subsidise the companies should it opt to maintain the rates.
Last month, when the toll rates of 17 intra-urban highways increased, the impact was felt by motorists in the Klang Valley. When PLUS eventually raised its toll rates, the impact will be felt by road users from Perlis to Johor.
The same goes for electricity tariffs. The rate hike next year would be felt by consumers in the peninsula.
Those in Sabah and Sarawak are not affected by both the price hikes in electricity and possibly toll rates.
The increase in prices next year comes at a time when the Government’s coffers are under pressure.
Consumer spending is already slowing down and the collection from the GST cannot be any higher than what has been projected.
The going is going to get tough in the next few months, as Malaysia continues to adjust to a period of low oil prices.
No matter what the policy makers say, the growing group of middle and lower-income groups will be affected.
Can we expect higher salaries? I doubt it, as the private sector is already feeling the heat. So, let’s brace ourselves for tough times.