Newly appointed Finance Minister Tengku Zafrul will have his hands full in finding ways to stimulate the economy

by ALIFAH ZAINUDDIN/ pic by RAZAK GHAZALI

THE newly formed government may have to consider expanding its revenue stream to prevent economic fallout after oil prices plunge to a four-year low of US$35 (RM148.30) per barrel.

FXTM market analyst Han Tan said the sharp drop in oil prices is expected to pressure the country’s fiscal standing, given that every dollar drop in Brent crude translates into an estimated loss of RM300 million in government revenue.

“With petroleum-related revenue accounting for about one-fifth of total government revenue in recent years, compared to less than 15% in 2016, Malaysia’s policymakers may have to place immediate emphasis on further diversifying its revenue streams.

“Such measures would help support the government’s ability to mitigate the downside risks to the domestic economy, allowing its fundamentals to shine through once the global uncertainties dissipate, which in turn would also shore up investors’ sentiment,” he said in an email to The Malaysian Reserve.

The 2020 budget was drawn based on the anticipation of oil prices averaging US$62 per barrel.

However, if oil prices continue to be suppressed throughout the year, pulling this year’s average down to US$32 per barrel — a full US$30 lower than the budget assumption — it would translate to a US$4.2b billion drop in oil revenue, said OCBC Bank (M) Bhd economist Wellian Wiranto.

Wellian said at the current US dollar/ringgit level of 4.2, this would mark a RM17.6 billion loss or about 1.1% of GDP.

“If we assume the unlikely event that no change is made to the expenditure to compensate for the drop in revenue, the deficit level would pick up from 3.4% to as much as 4.5% of GDP,” he said.

Under a worst-case scenario, Wellian said the Malaysian economy might be at the prospect of a deep fiscal wound from the sudden slump in oil price, at a time when it has already been at the receiving end of the impact from Covid-19 and the political squabble.

“While successive Malaysian governments have been attempting to reduce their dependence (of government revenue) on oil and gas receipts, the fact of the matter is that — in the absence of concrete revenue streams such as the Goods and Services Tax (GST) — it had been an uphill struggle,” he said.

The absence of GST, and its replacement with the Sales and Services Tax (SST), has resulted in over RM20 billion in turnover deficit for the federal administration — pushing it to rely more on oil dividend.

The GST collection in 2018 was estimated at RM43.8 billion, which accounts for about 18% of total revenue.

Collection from the SST in 2019 stood at RM27.5 billion, only half of GST’s collection.

Wellian said the newly appointed Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz (picture) will have his hands full in finding ways to stimulate the economy, apart from having to work out a more sustainable revenue source than the fickle petroleum.

“On an immediate basis, his priority will likely be to implement the RM20 billion stimulus package that Tun Dr Mahathir Mohammad announced on Feb 28.

Wellian said while the measures could be helpful, more would be needed in the face of ever-building sense of crisis.

“Hence, we continue to see monetary policy bearing the brunt of the policy response.

“There remains a dovish tilt to Bank Negara Malaysia’s statement, and we see the case for another rate cut to bring Overnight Policy Rate to 2.25% in the next meeting on May 5,” he added.