Fiscal deficit picture brightens

PETALING JAYA: Malaysia’s fiscal deficit could improve to 2.9% over gross domestic product (GDP) this year on the back of higher oil prices, surpassing the 3.1% target, said MIDF Research.
Last Wednesday, the price of Brent crude oil reached an intraday high at US$47.40 (RM185) per barrel, improving Malaysia’s fiscal outlook for 2016. Note that the government had recalibrated Budget 2016 based on two possible oil price scenarios, US$35 and US$30 per barrel.
“Hence, this means that oil prices have been averaging above the imputed projections for year-to-date,” MIDF Research said in a report last week.
As of April 28, crude oil price edged higher to average at US$43 per barrel while the US Federal Reserve’s recent dovishness has caused commodity prices to rally as investors price in the effect of a weaker dollar in the future.

Year-to-date, Brent averaged at US$37.10 per barrel, higher than the US$35 per barrel projection imputed in the recalibrated budget.
“While fiscal target is likely to be achieved, further upside are limited as oil price is projected to average at US$40 per barrel for the year. The recent rally in the oil price has limited upside as oversupply remains a threat despite pickup in demand due to marginally improving global economic condition,” said MIDF Research.
“The limiting factor lies on US shale oil producers as they are likely to operate closed rigs once oil price climb higher. At higher price, operation becomes feasible and profitable,” it added.
The performance of exports was weak for the first two months of 2016, contracting by 2.8% year-on-year in January and later rebounded in February by 6.7% year-on-year. On average, exports grew by 1.5% year-on-year for the two months despite having a low base.
“The outlook for March’s performance is rather dim as major trading partners show little sign of improvements. On this score, fiscal consolidation could be affected if economy expanded slower than expected,” it said.
“Barring any unforeseen circumstances, ceteris peribus, Malaysia stands to benefit from higher oil prices. We estimate that fiscal deficit could improve to 2.9% over GDP from 3.2% reached in 2015,” it added.