WITH oil prices at historic lows, Putrajaya will likely have to consider spending cuts and find new revenue sources as it seeks to cushion Covid-19’s impact on the economy, said experts.

The government has to do more despite giving an assurance that it has factored oil prices in its deficit projection of more than 4% this year.

US benchmark WTI crude on Monday crashed to below US$16 (RM70) a barrel for the first time in 20 years.

Sellers have had to pay buyers to take barrels off their hands as storage space runs out due to a supply glut.

Meanwhile, global benchmark Brent crude traded at around US$16 a barrel.

To mitigate oil revenue losses this year, Putrajaya may have to resort to a combination of revenue enhancement measures, spending cuts and higher borrowings, said Sunway University Business School economics Professor Yeah Kim Leng.

Alternative non-tax revenue sources include dividends from government-linked companies, the sale of assets, and various other privatisation modes.

“On the spending side, the government could reallocate spending, for example, from security to health,” said Yeah.

“It could also consider reducing overall spending by cutting salaries and other operating expenses, while postponing development projects after weighing the costs and benefits.

“I think all the (big) three international credit rating agencies have maintained Malaysia’s sovereign credit rating at A-/A3, but with a negative outlook for one or two of them.

“In any case, the government borrowings will be ringgit-denominated, and there is sufficient liquidity and good appetite among local institutional investors to absorb the government debt issuance, notwithstanding foreign investors’ increased risk aversion.”

Malaysia’s oil trade balance registered at RM36.7 billion last year, while oil-based revenue accounted for 20.7% of total government revenue.

AmBank Research, in a note recently, said the reliance on oil revenue is leaving the Malaysian economy vulnerable to global market movements.

“The risk stems from the government’s estimate in Budget 2020 that the Brent oil price would be US$62 per barrel. For every US$1-per-barrel drop in price, it will reduce oil revenue by RM300 million.

“Thus, pressure on the fiscal deficit/gross domestic product, which is now at 3.4%, could rise to between 3.6% and 3.8% of GDP, based on an RM8.1 billion loss in revenue.”

If the oil price weakens to between US$20 and US$25 a barrel, Malaysia could see a revenue shortfall of RM11.1 billion to RM12.6 billion.

Finance Minister Tengku Zafrul Tengku Abdul Aziz has forecast a deficit of more than 4% in GDP after factoring in the impact of lower oil prices. Last October, the figure was set at 3.2%.

He maintains that Malaysia is in a “strong fiscal position” and the country can afford to pump-prime the domestic economy with the RM250 billion Prihatin stimulus package.

Wan Farisan Wan Sulaiman, section chief of the Finance Ministry’s fiscal and economics division, said Putrajaya will need to reprioritise the budget to maintain the current deficit level.

“The Malaysian economy is expected to be adversely affected as it is a net exporter of oil and gas.

“Lower export revenue from falling oil prices will also put pressure on the value of the ringgit, impacting investor confidence in the Malaysian economy.”

Spend international reserves?

Last year, the government projected its revenue from petroleum on an estimation of US$62 per barrel in 2020, translating to an average of RM50.5 billion in revenue.

“The scary part is this year, with this major revenue source bringing in no money, the government will struggle if the Covid-19 pandemic drags on,” said KSI Strategic Institute research director Voon Zhen Yi.

“It will struggle to provide businesses, individuals and households with financial relief to survive.

“To be fair, the government, including the previous two administrations, has been trying to reduce dependency on oil and gas as a major source of revenue for some time. They have been encouraging Malaysians to be innovative and trying to promote entrepreneurism.

“Now that Covid-19 might be around for a while, it is more challenging to predict demand in the market. Even if we could predict demand, people might not be able to access equipment, manpower and the licences necessary to produce that type of supply.”

Even when oil prices start rising, a quick return to breach US$60 a barrel is unlikely, said Universiti Malaya economics Professor Rajah Rasiah.

Health experts have said it will take a year to 18 months before a coronavirus vaccine is found.

The government should look at spending a portion of its US$102 billion international reserves, which can support 7.3 months of imports, said Rajah.

“It should keep five months’ worth of imports and spend the balance of 2.3 months. It can also access funds from the 1988 natural resource fund,” he said, referring to Kumpulan Wang Amanah Negara, or the National Trust Fund, that is managed by Bank Negara Malaysia.

“The consequences are bleak as the government will have to exhaust its international reserves to finance its expenditure. Nonetheless, interest rates can be expected to remain low, owing to the severe contraction in demand.”

He also supports the “soft landing” approach advocated by Director-General of Health Dr Noor Hisham Abdullah, where some sectors will be allowed to operate with strict health controls in place, thus reducing the economic damage from the pandemic.

A gradual recovery in oil prices is expected next month once the Organisation of the Petroleum Exporting Countries cuts production, coupled with a return in demand as lockdowns are slowly lifted around the world, said oil and gas analyst Noor Athila Mohd Razali.

“However, should the low oil price environment persist by perhaps six months or more, we might see a more significant impact on the oil and gas industry going forward, with investment in the sector expected to shrink further, limiting both offshore and onshore activities.”

No GST, to borrow more

The unpopular goods and services tax, which became campaign fodder in the last general election, is still seen as one of the better revenue earners as a broad-based consumption tax.

But to bring it back as another revenue stream in the current climate would be politically costly, said Malaysian Industrial Development Finance research analyst Zafri Zulkeffeli.

“During the GST years, however, the average dependency on oil revenue was about 16.3% (instead of 20% without GST).

“Hence, we can expect a significant drop in government revenue and for the budget deficit to widen. In fact, the budget deficit is affected more by the plunge in oil prices through a revenue drop rather than the RM35 billion injection via stimulus packages.

“Spending will be quite complex for this year, given that the economy needs huge injections to combat Covid-19’s effects.

“We think Putrajaya will move towards lifting its self-imposed rule on the government debt ceiling ratio from 55% to probably 65%. Issuing more debt is essential at this juncture, and it is easier to obtain.” – April 25, 2020.