Budget 2020 needs to be revised amid falling oil prices, say analysts

MALAYSIA’S Budget 2020 would have to be recalibrated as the global crude oil prices tumbled to its lowest since the Gulf War and is expected to nosedive further.

Analysts are of the opinion that the newly minted government would have no choice, but to face its first and biggest challenge yet — the crash in oil price — by revising the national budget which was based on estimated average oil price at US$62 (RM261.02) a barrel.

As of 5pm yesterday, Brent crude was at US$33.27 per barrel, 46% lower than the benchmark set by the previous government for this year’s budget. The collapse in oil price came after Saudi Arabia launched a price war after a fallout with its oilcutting alliance Russia last Friday.

The fall yesterday also marked the biggest daily loss in more than 11 years, and consensus believes that it might turn into a full-blown price war.

“There is a need to recalibrate the budget as the prevailing condition has changed. It seems that there are two negative shocks which could undermine the economic growth and inadvertently, government revenue collection.

“Therefore, there needs to be a shift in the fiscal deficit target in order to align with the current economic climate,” Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told The Malaysian Reserve (TMR) recently.

What Sparked the Oil Price War?

Last week, Saudi Arabia wanted to lead OPEC and Russia in making deeper cuts to oil production to support crude prices in the face of the coronavirus outbreak which has disrupted global economic activity.

But when Russia balked at the plan, the Gulf kingdom turned on an ally it had worked with to prop up the oil market since 2016.

A day later, on Saturday, Saudi Arabia announced massive discounts to its official selling prices

Two negative shocks could undermine the economic growth and inadvertently, govt revenue collection, says economist

Budget 2020 needs to be revised amid falling oil prices, say analysts for April, and the nation is reportedly preparing to increase its production above the 10 million barrel per day mark, according to a Reuters report.

In a layman’s term, Russia said it is no longer bound by any production quota, while Saudi Arabia immediately lowered its oil prices. The kingdom currently pumps
9.7 million barrels per day, but has the capacity to ramp up to 12.5 million barrels per day.

The happenings are reminiscent of 2014 when Saudi Arabia, Russia and the US competed for market share in the oil industry. Back then, as production escalated, prices plummeted.

What Does a Fall in Oil Price Means for Malaysia?

The decline sensitivity in the country’s oil-related revenue is RM300 million for every US$1 drop in crude oil prices, excluding Petroliam Nasional Bhd’s (Petronas) dividend to the government, according to Mohd Afzanizam.

As a net oil exporter, a fall in oil price would inevitably harm the government’s coffers. In 2015, the oil slump had caused oil revenue for the Malaysian government to shrink to RM42.7 billion from RM62.5 billion in 2014. The amount declined sharper to RM28.1 billion in 2016.

A fall in oil price will also not bode well for the oil and gas (O&G)-related stocks.

Has Malaysia Revised a Budget Due to Lower Oil Price Before?

Malaysia’s last budget recalibration was done on Jan 28, 2016, when oil prices fell below US$35 per barrel for about a month. Budget 2016 was revised based on a lower Brent crude price assumption of US$30-US$35 per barrel (from US$48 per barrel originally), which resulted in a revenue shortfall of between RM7.8 billion and RM9.4 billion.

The fiscal deficit target was left unchanged at -3.1% of GDP for 2016 as measures were then introduced to cut expenditure, enhance revenue and stimulate growth.
Mohd Afzanizam said under the current circumstances, it is acceptable to have wider fiscal deficits as the private sector (businesses and households) may not be inclined to spend.

“The government has to manage the aggregate demand so that it will continue to grow,” he added.

Before the collapse of OPEC’s supply cut agreement with Russia, oil prices have been under intense pressure as the Covid-19 outbreak has also led to softer demand for crude. Sunway University Business School economics Prof Dr Yeah Kim Leng also believes a budget recalibration is likely needed should the oil price war keep the price below US$40 a barrel for six or more months.

“This scenario has a strong likelihood of materialising due to global oversupply, changing competitive dynamics caused by US shale O&G exports and the sharp fall in demand due to the severe economic impact of Covid-19 epidemic that is now spreading to more and more countries.

“Moreover, the newly installed Cabinet and finance minister may have the added impetus to realign the 2020 budget allocations according to its priorities, including possibly a second stimulus package to buttress the domestic economy against the virus,” he said.

Yeah said there is still room to loosen the purse strings, especially if the spending helps spur the economy, but over-the-limit debtdriven spending without new revenue sources could jeopardise the country’s fiscal soundness.

MIDF Amanah Investment Bank Bhd in a note yesterday said it is expecting the country’s GDP growth this year to be “under pressure”, following the continuous
slump in crude oil prices that escalated yesterday.

“Plunge in global oil price will suppress Malaysia’s fiscal capacity given that the current Budget 2020 is based on the assumption of US$62 per barrel.

“The newly formed government will likely revise Budget 2020 and we may see a reduction in government expenditure and investment,” the research arm said.

Global Forecasts Morgan Stanley forecasts that Brent will fall to US$35 per barrel in the second quarter of 2020 (2Q20), with US West Texas Intermediate (WTI) crude trading at as low as US$30 per barrel. The firm’s prior forecast had Brent at US$57.50 and WTI at US$52.50.

Goldman Sachs analyst Damien Courvalin in a note on Sunday said the firm believes the prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus.

Goldman cut its 2Q and 3Q Brent forecast to US$30 per barrel, and said prices could dip into the US$20s. UOB Global Economics and Markets Research also downgraded its Brent crude oil forecast materially to US$35 a barrel by 1Q20, US$30 by 2Q20, US$35 by 3Q20 and US$45 4Q20.

“The anticipated mild recovery in crude oil price in the second half is contingent upon the Covid-19 outbreak being brought under control by the middle of the year,” United Overseas Bank Ltd (UOB) head of market strategy Heng

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