UBS: Fiscal deficit goal reachable

KUALA LUMPUR: Malaysia is expected to meet its fiscal deficit target of 3% of gross domestic product (GDP) in 2015 if oil prices average US$70 to US$75 per barrel, said UBS, as it forecasts the brent oil price to average US$70 per barrel in 2015 and US$80 per barrel in 2016.
UBS senior Asean and India economist Edward Teather (pix) said the government will more or less meet its target but the task is going to be more challenging than it was previously if oil prices remain low.
"On one hand, you have the revenue from government, which is about 30% oil related and Petronas (Petroliam Nasional Bhd) has suggested that if the oil price is going to be down around US$75, they will cut the funds to government.
"But at the same time you have this offset from lower subsidy spending (from the deregulation of petrol price). As long as oil price average US$70 to US$75 per barrel, the government should be able to manage that situation and the deficit target could be achievable," he said during a conference call last Friday.
However, he cautioned that if the oil price averages much lower around US$60 per barrel, then there will be no longer be a reduction in subsidies to offset the lower revenues and there is a possibility that the government could miss the deficit target.
"I expect the government to try and meet its target within reason and not to use this as an excuse to adopt a populous policy and to rupture up a wider fiscal deficit," said Teather.
He said the oil market can remain well supplied in the first quarter next year (Q1), and as oil price goes soggy into Q1, there would be some stabilisation within six months.
"As you go through 2015, the lower oil price will encourage oil producing firms and countries to cut back on oil production and that reduces the supply. Meanwhile lower oil price will in turn encourage more demand for oil so there is a self correcting mechanism here and markets have the tendency to overshoot in both directions."
He added that demand for non-oil exports ought to rise but despite that, it is looking for a shift in emphasis in the economy away from oil and overall, the net negative impact on the economy from the oil prices.
"One of the most noticeable fallouts of the plummeting oil price has been the weaker ringgit. We tend to think that Asian and Asean countries will continue to weaken against the US dollar in 2015 but the ringgit does looks on the verge of overshooting against that trend.
"In time, we think a stabilising oil price and the ability from Malaysian investors to bring capital home from abroad should help stabilise the currency. As such, we look for the US dollar-ringgit exchange rate to reach 3.50 at the end of 2015, and that comes in the context of ongoing decline in Asian currencies against the US dollar."
UBS has revised its Malaysian GDP forecast in 2014 to 5.8% but see a sharper slowdown in 2015 to 4.5%. For 2016, it is forecasting a 4.7% GDP growth.
"Things are not looking great for Malaysia, in our view, with investment and export growth dwindling in 2014. Growth was rising surprisingly on consumption to support overall growth in the last quarters. Looking ahead, oil price has now generated a negative income shock to the Malaysian economy, and lower oil price in that sense is adding fuel to the fire," Teather said.
He added that it is going to transmit to the wider Malaysian economy through lower business confidence, lower investments and lower exports.
With income taking a bruising from these directions, he said consumption is not expected to continue to outperform and the goods and services tax (GST) being introduced in April 2015 is an "extra twist" over the net effect of GST.
"The incentive will be for consumers and households to spend before the GST hike comes in and that should support activity in early 2015 but that will be implying a bit of a drag later in the year once consumption dip following the front loading and spending," said Teather.
However, the introduction of the GST comes at a good time when government revenue is going to be constrained by lower oil revenue.
He added that inflation is also unlikely to be as high as feared in Malaysia, projecting inflation at 3.9% in 2015, below the government's 4% to 5% estimate in the Budget.
"Lower-than-expected growth and lower-than-expected inflation should set the stage for lower policy rates. We now forecast Bank Negara Malaysia cutting a 25bps during 2015, taking the policy rate back to 3%," said Teather.