Economists in general say it is too early to institute any budget review given the fact that crude oil prices still remain uncertain at this juncture. Sunway University Business School Professor of Economic Dr Yeah Kim Leng said the decline in crude oil prices was a temporary phenomenon, pending further development on the supply side. “We need to wait and see whether the Malaysian economy suffers as a result of the decline in crude oil prices. ”As we know, the Organisation of Petroleum Exporting Countries (OPEC) are still reviewing production cuts to stabilise prices. “If they manage to further reduce supply, the price might rebound to range between US$60 and US$70 per barrel, the level OPEC is looking at,” he told Bernama.
Minister of Finance Lim Guan Eng said on Monday that the government would not recalibrate the 2019 Budget 2019 unless the average crude oil price dips below US$50 a barrel. Dr Yeah said the government should monitor to see if prices drop sharply over the next six months to warrant any review and to ensure the fiscal deficit does not widen further. “Year to-date, the average Brent crude oil price hovered around US$71.98 per barrel. After the first half of next year, if oil prices remain below US$70 per barrel, which is the government’s assumption, then there will be a need to review. “But, with OPEC reviewing the production cut coupled with prospects of demand picking up against a backdrop of modest growth for the global economy, demand for oil would continue to be moderately strong to support higher prices,” he said. Dr Yeah also said the budget review would require spending cuts as every drop of US$1 in oil price would mean a RM300 million deficit in revenue. “Therefore, a fall of US$10 a barrel would work out to a whopping RM3 billion in reduced revenue. Dr Yeah also opined that the government might not need to resort to a budget review if it can find other sources of revenue to offset the decline which included monetisation of assets and privatisation. On the other hand, he added that lower oil prices would mean the government would pay less in corresponding oil subsidy which would work out to about RM3 billion this year.
Bank Islam Chief Economist Dr Mohd Afzanizam Abdul Rashid said the 2016 Budget was recalibrated when Brent crude fetched US$28 per barrel on Jan 20, 2016. “Perhaps, when crude oil prices drop below US$30 per barrel, that could be used as a yardstick to determine if there should be any adjustments to budget allocations,” he said. Additionally, he noted that Petronas would pay RM30 billion in special dividends to the government next year and this would not be affected by current oil prices. The dividends would be paid from Petronas’ reserves which currently stood at RM402 billion, as at Sept 30, 2018, from its past cumulative profits and it would be sufficient for the government to proceed with the spending plans under the Budget 2019 allocation, he added.
In contrast, Chairman, Malaysian Association Of Technical Analysts, Datuk Dr Nazri Khan Adam Khan said the government needed to recalibrate the budget as soon as possible as a proactive measure considering the uncertain economic conditions it was now facing. “The price of oil has deviated so much from US$70 a barrel, which is the assumption price of the government for the 2019 Budget. “West Texas Intermediate oil was already down to US$45 a barrel and still dropping with prolonged and escalating trade tension between the United States and China,” he said. Nazri opined that the government needed to be a step ahead to cushion the impact of declining oil prices. “It could be costlier for the government if it is slow to react. “In the near future, the damage could be done and “might affect the balance budget that we are looking at, between fiscal discipline and economic growth,” he added.
Meanwhile, oil prices steadied on Wednesday on perceptions that a price slide to 2017 lows prompted by economic worries had been overdone amid an OPEC-led effort to tighten supply. Crude has been caught up in wider financial market weakness as the U.S. government shutdown, higher U.S. interest rates and the U.S.-China trade dispute unnerved investors and exacerbated worries over global growth. Brent crude oil futures, the global benchmark, was up 3 cents at $50.50 at 8:45 a.m. ET (1345 GMT). It earlier fell to $49.93, the lowest since July 2017, and posted a 6.2 percent slide in the previous session. U.S. West Texas Intermediate crude futures was up 38 cents at $42.91. WTI settled at its lowest level in a year and a half on Monday.