OCBC: Malaysia could restore fiscal health in 3 years
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Malaysia has a reasonable chance of restoring its fiscal health within three years if the economic growth remains stable with new revenue streams and stable expenditure, according to OCBC Bank chief economist Selena Ling. “But if you have a case where the global environment is very serious and dire and there is no deal between US and China… then it becomes a very hostile environment for any developing country to operate in,” she said last Friday.
She noted that if the global economy remains at a status quo for the rest of the year and crude oil prices stabilise, Malaysia may miss the fiscal deficit target by 0.1-0.2 percentage points.
Having said that, the potential slippage is not expected to be “very severe” that will derail Malaysia off its targets.
“Rating agencies also want to see a multi-year plan. If it’s just a slippage of one year that you can attribute to a lot of external factors, probably the rating agencies will give you a pass. It’s really not a one year story they’re looking for,” she explained.
The government has projected fiscal deficit to ease to 3.4% of gross domestic product (GDP) this year from 3.7% in 2018. It looks to further narrow the fiscal deficit to 3% and 2.8% in 2020 and 2021, respectively.
Ling projects Malaysia to record a full-year GDP growth of 4.4% for 2019 amid slowing global growth and the ongoing external headwinds.
“Ling projects Malaysia to record a full-year GDP growth of 4.4% for 2019 amid slowing global growth and the ongoing external headwinds.”
Malaysia’s ringgit, on the other hand, could appreciate to RM4 against the greenback in the event of a weak dollar.
She said the strengthening of the ringgit will have less to do with domestic factors as the slowdown in economic growth is seen as benign, coupled with an unlikely change in the Overnight Policy Rate (OPR).
Another reason that could be supportive of strong ringgit is the risk of the US economy falling into a recession next year.
Meanwhile, Ling expects oil prices to be subdued and could result in a shortfall in government coffers if they remain at the current level of around US$50 per barrel until year-end.
Although Budget 2019 is based on the oil price assumption of US$70 per barrel, she does not see a need to recalibrate the budget at this juncture, but it will exert pressure on seeking new revenue sources.
“As far as the budget revision is concerned, I suspect (it will) not be so soon because the US$70 is a medium-term price target and oil prices have been volatile in the last six months.
“But if you look at the average price, it is relatively stable and maybe for the next budget in October 2019, they (the government) may revise the oil price assumption,” she added.
Questions & Answers
Q.What conditions are necessary for Malaysia to restore its fiscal health within three years?
What conditions are necessary for Malaysia to restore its fiscal health within three years?
Malaysia needs stable economic growth, new revenue streams, and stable expenditure to restore its fiscal health. However, a severe global environment, like a US-China trade dispute, would make this very difficult to achieve.
Q.Why might Malaysia miss its fiscal deficit target this year?
Why might Malaysia miss its fiscal deficit target this year?
Malaysia might miss its fiscal deficit target if the global economy remains status quo and crude oil prices stabilise. The estimated slippage is between 0.1-0.2 percentage points, but this is not expected to be severe.
Q.What factors could lead to the Malaysian ringgit appreciating against the US dollar?
What factors could lead to the Malaysian ringgit appreciating against the US dollar?
The ringgit could appreciate to RM4 against the US dollar if the dollar weakens, potentially due to a risk of the US economy entering recession next year. Domestic factors are considered less influential.
Q.How might subdued oil prices impact Malaysia's government finances?
How might subdued oil prices impact Malaysia's government finances?
Subdued oil prices, if they remain around US$50 per barrel, could result in a shortfall in government coffers. This would put pressure on seeking new revenue sources, though a budget recalibration is not expected soon.
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