Fiscal deficit of 2.6% to GDP if oil price averages US$50 a barrel: Economist

KUALA LUMPUR: The government can reduce the fiscal deficit to as low as 2.6% of gross domestic product (GDP) if oil prices average US$50 (RM209) per barrel, said Deutsche Bank, Singapore, economist Diana Rose del Rosario.
“Our house view is at least US$50 per barrel on average. If we are right in 2017, we see that the Finance Ministry has room to meet a lower fiscal deficit of as low as 2.6% of GDP,” she said at a dialogue on Budget 2017 organised by the Malaysian Economic Association yesterday.
She said the 3% fiscal deficit projection announced under Budget 2017 is on the conservative side and made under the assumption of an average oil price of US$45 per barrel.
Rosario said some of the downside risks that may affect Malaysia are protracted weakness in commodity prices, global trade activity, slowdown in China and European Union uncertainty arising from Brexit.
Rosario said in order to continue with its fiscal consolidation, Malaysia must strive for a lean and efficient public service.
“Emoluments account for 26% of total opex and government already tightened spending in this area. It used to grow 10% year on year between 2010 and 2014. In a sense growth has fallen 50% to 5% year on year 2016 to 2017. Success has been there in terms of tightening in this area but there remains great room to cut down emoluments,” she said.
Rosario said Malaysia has a high number of civil servants compared with the rest of Asean, with 5.1 civil servants for every 100 population.
Meanwhile, she noted, debt service payments and pension charges account for almost 20% of total opex. There is upward pressure on debt service payments given that interest rates are set to rise while pension charges are set to increase 15% this year.
While Malaysia’s aging pace is set to stabilise over the next five years, the working force is heading towards sustained deceleration over the next five years.
“This does not bode well for tax collections and domestic demand. There is a need to ramp up real wages, ideally stemming from a boost in productivity, to offset this,” she said, adding that there is room for further subsidy rationalisation.
However, she is sceptical about the government’s projection for corporate income tax collections, which is set to increase by RM6 billion next year.
“We don’t see any force to drive CIT (corporate income tax) collections given that CIT rate is the same ... but even with lower CIT collections the government can still achieve a fiscal deficit of about 2.8% if the oil price is higher (than US$45 per barrel).”
Meanwhile, Secretary General of the Treasury Tan Sri Dr Mohd Irwan Serigar Abdullah said while contingent liabilities are a pressure, there is no danger in terms of default.
He was commenting on claims that Non-Financial Public Corporations' spending deficit is a “time bomb”, growing from RM10.6 billion in 2013 to RM52.3 billion in 2014 and RM56.9 billion in 2015.
"Linking NFPCs to the government debt level and so on, I mean it is a contingent liability, it is a pressure, we know, but it's not a time bomb. They can repay their loans. They are big entities with large resources, they are making profits. All those entities like Tenaga Nasional, Telekom they are making profits," he said.