The budget department of the government’s treasury must surely be in panic mode at present, given that global oil prices have fallen by about half since the 2015 budget was announced, and especially since oil and gas takings contribute 30% of total national revenues.
The Prime Minister tabled a 2015 budget of RM273.9 billion last October, when global crude oil prices were at US$100-105 per barrel, but they have fallen to below US$56 per barrel this week and signs seem to indicate they will continue to dip further. Analysts estimate that for every US$1 drop in the price of crude oil, Malaysia’s oil revenue will decline by RM400 to RM500 million.
This has both immediate and long-term implications on the national budget. First, on short-term impact, the government will almost definitely not be able to meet its budget deficit target of 3% of GDP, falling back to 4% or more. It will also be important to observe whether international rating agencies will re-evaluate Malaysia’s sovereign credit rating or not, given these latest changes.
Whilst it is a good sign that we have now moved away from oil subsidies to a managed float, the low oil prices have become a major setback when it comes to maintaining fiscal discipline. The additional takings from the Goods and Services Tax (GST) that will be implemented in April this year may not compensate for the loss of revenues due to the low oil prices either, after deducting what the government would have otherwise received from the existing sales and service tax (also at 6%) and then taking into account the costs of managing the GST exercise throughout the country.
Of course, in order to rein in expenses, the government could very well revise some of its estimated costs such as those in the category of “supplies and services”, the second highest operating expenditure line item.
“Supplies and services” makes up RM38.1 billion of the 2015 total budget, a more than 60% increase in spending in this category when compared to just RM23.8 billion five years ago in 2010. This is an unusually significant increase for this line item that is basically payment for maintenance and repairs, utilities and payments for professional and technical services. Especially so, since this is the category which the many discrepancies in payments for services as highlighted by the Auditor-General’s reports fall under.
The second more important long-term implication for those managing the budget is that Malaysia needs to build up its non-oil sector so that this can eventually constitute a larger percentage of total revenues, so as to not rely entirely on oil revenue in the long term. The theory that oil-dependent nations are vulnerable is revealing itself to be true this year – sudden changes to global oil prices (and this is an external trend that simply cannot be controlled domestically) would have an immediate impact on our ability to spend. This means that even expenditure for the purposes of basic infrastructure, education and healthcare would be affected.
One way to ensure that the lucrative oil revenues earned during healthy periods can be used sustainably over the long-term is to have a natural resource fund. Malaysia already has a natural resource National Trust Fund, or Kumpulan Wang Amanah Negara (KWAN) that is currently managed by the Central Bank. It has accumulated about RM9 billion since its formation in 1988 (predominantly contributions from Petronas), which is a good start but the rules governing the fund are still relatively weak, as an IDEAS policy paper that we will release soon will elaborate upon in greater detail.
The idea behind a well-governed natural resource trust fund is to save for future generations. The Norwegian Global Pension Fund is a good example of a natural resource fund that is well managed. It has a full website, complete with information about the fund’s objectives, value and transparency rules. As it states in its introduction, “The Government Global Pension Fund is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population.” The same should apply in Malaysia.
This would be a more structured way of dealing with oil revenues, as opposed to the government determining how much of Petronas dividends are given. The Ministry of Finance stated explicitly that Petronas does not have the authority to decide the amount of contribution they should make annually, and that such authority lies with the government as the owner of the national oil company. Clearly this intervention is unhealthy and making Petronas more independent as a professional international company is a better route. Better governance of the entire management of the oil and gas sector is needed.
Finally, another implication for the government over the long term is that it ought to engage in greater transparency and openness with the public. Already there are calls for the government to officially give a statement on how lower oil prices will affect the budget (both in terms of deficit figures and overall spending abilities). IDEAS is launching the Open Budget Index 2015 in the middle of this year, which evaluates how transparent and well-governed the Malaysian budget is – along with the entire budgetary process – in comparison with other countries around the world.
If not already being done, it is imperative that the Ministry of Finance develops various possible scenarios based on the different ways oil prices might fall in the next months to come. If there is a need to restructure the 2015 budget based on these changes, then so be it. This would send a positive sign to the investing community, as the government explores how the fluctuating oil prices will impact upon our budget and economy, emerge with solutions to deal with the situation, and be forthcoming with the public on these strategies.
Tricia Yeoh is the chief operating officer of IDEAS