Derailing Budget 2018 assumptions

AN improving global economy, higher prices of oil, buoyant exports of Malaysian electrical and electronic goods as well as better than expected tax revenue have made Finance Minister Datuk Seri Najib Abdul Razak's task of crafting Budget 2018 significantly easier.

This may have prompted Second Finance Minister Datuk Seri Johari Abdul Ghani to state publicly Putrajaya has "no intention to further impose taxes on the people" in Budget 2018 – scheduled to be tabled in Parliament on Oct 27.

Three events could derail assumptions underlying Budget 2018. This suggests the watchwords for this country's top policy makers are continuing with caution.

First, interest rates are beginning to creep upwards and could accelerate next year. Reuters expects US President Donald Trump to announce next week whether Federal Reserve chairperson Janet Yellen's tenure will be extended.

If Yellen is replaced on Feb 3 next year by a monetary hawk but a financial regulatory dove like former Federal Reserve governor Kevin Warsh, US interest rates could be ramped up aggressively. Another hike – the third this year – is a near-certainty in December this year.

Rapidly rising interest rates is an area of vulnerability for the federal government and Malaysian households. Between 2017 and 2019, the budget deficit to GDP ratio is expected to rise – although this ratio is unlikely to exceed 5% – while government debt to GDP could expand to between 50% and 60% during the same period, the World Bank says.

More worrying is the indebtedness of non-financial government linked companies (GLCs).

Their median debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio jumped fourfold from 2011 to the first quarter of this year, a study by S&P Global Ratings shows.

Although Wan Saiful Wan Jan, chief executive of the Institute of Democracy and Economic Affairs lauded Putrajaya for making changes in the profitability of 20 GLCs, he highlighted one area of concern – unlisted GLCs.

Things get even murkier at the subnational or individual state level where there is little disclosure and accountability, he added.

Furthermore, despite a slight decline in Malaysia's household debt as a proportion of Gross Domestic Product (GDP) to 88.4% last year, it remains among the highest in the region, Bank Negara said.

Second is heightened uncertainty about the long-term trend in oil prices.

Last Friday, Trump announced he will not certify Iran's compliance with the July 2015 nuclear accord and will ask Congress to enact legislation that could re-impose sanctions on Iran.

Theoretically, sanctions could remove 2.4 million barrels of Iranian oil exports from the global market and cause prices to spike upwards.

In response, European Union's foreign policy chief Frederica Mogherini emphasised the Iran nuclear accord is not a domestic issue, but a UN Security Council resolution.

Noting the International Atomic Energy Agency has verified eight times that Iran has implemented all its nuclear-related commitments, she said there have been "no violations" of any commitment in the agreement.

In a joint statement, German Chancellor Angela Merkel, French President Emmanuel Macron and UK Premier Theresa May reiterated their commitment to the Iran agreement, adding this is "in our shared interest".

Assuming sanctions against Iran will, at best, be ineffective, several analysts believe oil prices could trend lower.

Last Thursday, the International Energy Agency (IEA) cited three factors that could dampen the outlook for oil prices next year – growing stocks, rising non-Opec (Organisation of Petroleum Exporting Countries) production and stagnant oil demand.

Additionally, Europe's largest energy company, Royal Dutch Shell, is preparing for a world of "lower forever" oil prices.

Its chief executive Ben van Beurden says the company is now "getting fit" to be profitable even when oil trades at US$40 a barrel.

Even more bearish, Chris Watling, chief executive of Longview Economics, believes over the next six to eight years, oil prices could crash to US$10 a barrel as "alternative energy in some forms is gathering speed (and) things are changing".

Over the long-term, "what happens with electric vehicles is really, really important" because 70% of oil is used for transportation, he added.

Third is an ultra-combative Trump. Over-heated rhetoric exchanged between him – including a threat to "totally destroy" North Korea – and Hermit Kingdom leader Kim Jong-Un punctuated by Pyongyang testing missiles of increasing reach, US military bombers overflying the Korean peninsula and the American navy visiting Busan in South Korea, have caused rising tension in the region.

Republican Chairman of the Senate Foreign Relations Committee Bob Corker says Trump's recklessness has placed the US on the "path of World War III".

Within 10 months, Trump has lost 13 high-level White House staff plus one Cabinet member while speculation increases about his longevity in the White House.

Like an unguided ballistic missile, Trump may be the biggest threat to East Asia and the global economy.

Opinions expressed in this article are the personal views of the writer and should not be attributed to any organisation she is connected with. She can be contacted at