M’sia’s fiscal deficit may widen, economists say

More money needs to be injected to stimulate economic growth due to fall in oil revenue, says expert

by NUR HANANI AZMAN / pic by TMR FILE PIX

MALAYSIA’S fiscal deficit may widen beyond 3.4% of GDP if the government is unable to curb expenses and recover the loss of potential petroleum revenue due to falling oil price.

Putra Business School associate Prof Dr Ahmed Razman Abdul Latiff said in a situation like this, normally a government will inject additional money into the economy. However, he said, this will increase the government’s debt.

Cash injection, he said, is only a short-term measure which will not provide a long-term sustainable outlook.

“What the government needs to do is to reform the monetary system by controlling the credit in the market via sovereign bank system and start protecting the ringgit by pegging it to a basket of commodities.

“The economy will be slowing down further, but the market will be more resilient. In the long run, people and the nation will be more prosperous,” he told The Malaysian Reserve (TMR).

Last month, the government announced a RM20 billion economic stimulus package aimed to soften the impact of Covid-19 and it was commended by industry players and economists mainly for its ability to boost the domestic economy.

The 2020 growth projection is also lowered to between 3.2% and 4.2% (from the previous 4.8%), while the fiscal deficit target is revised to 3.4% of GDP, wider than the initial target of 3.2%.

Economic analyst Dr Aimi Zulhazmi Abdul Rashid said there will be a slight increase in the deficit by 0.2% as stated by former Prime Minister Tun Dr Mahathir Mohamad during the economic stimulus package announcement.

“The slower growth will certainly have a direct impact on the country’s economy, especially the significant drop in crude oil prices recently.

“With the slowdown in economy and smaller profit margin for banks attributable to lower interest rates will further erode the position,” he told TMR.

In order to stimulate the domestic economy, the government must increase its spending and borrow more, including injecting additional funds for the stimulus package if it’s insufficient, he added.

“The problem is the equity market and ringgit are at the lowest in many years, thus putting borrowing cost on the challenging side,” he said.

Academy of Sciences Malaysia fellow Dr Madeline Berma shared similar opinion on Malaysia’s fiscal deficit.

“Studies showed that for every US$1 per barrel drop in oil prices, it will reduce Malaysia’s oil revenue by RM300 million. It will also affect external borrowings and debt positions.

“The lower fuel prices, however, will boost consumer spending and domestic investment,” she said.

There is a need to inject more money as the economic stimulus package was formulated to mitigate the economic impact of Covid-19, she added.

“More money needs to be injected to stimulate economic growth due to fall in oil revenue,” she said.

According to OCBC Bank economist Wellian Wiranto, the fiscal deficit can be pushed to 3.6%3.8% of GDP, depending on the severity of global situation, before the ratings agencies balk.

“Hence, we continue to see monetary policy bearing the brunt of the policy response. As detailed in our March 3 report, there remains a dovish tilt to Bank Negara Malaysia’s statement, and we see the case for another rate cut to bring the Overnight Policy Rate to 2.25% in the next meeting on May 5.

“A lot, however, would hinge on whether the global market sentiment, especially on the currency front, is stable enough in the next two months,” he said.

Given how choppy market has been even in the last week or two, this is going to be a long interim period where anything feels possible, he added.