Malaysia revised budget 2015: cuts RM5.5 bil, deficit target 3.2%, focus on manufactured goods

Prime Minister Datuk Seri Najib Razak delivers his speech on the revision of the Budget 2015 at the Putrajaya International Convention Centre today. He said a slew of cuts amounting to RM5.5 billion will take place as part of Putrajaya’s proactive measures. – The Malaysian Insider pic by Nazir Sufari, January 20, 2015.

Prime Minister Datuk Seri Najib Razak today announced a slew of budget cuts amounting to RM5.5 billion as part of Putrajaya’s “proactive measures” to align itself with plunging global oil prices and revised world economic growth projections.

The cuts would come from the Budget 2015’s operational expenditures that were initially set at RM223.4 billion, while the RM48.5 billion for development would remain untouched, Najib said in his speech today at the Putrajaya International Convention Centre.

Also, the fiscal deficit target of 3% of the Gross Domestic Product (GDP) for the year has been revised to 3.2%.

Najib said this was still lower than 2014’s fiscal deficit of 3.5%. The "proactive measures" to achieve the RM5.5 billion savings are:

“(The government will) optimise outlays on supplies and services, especially overseas travel, events and functions and use of professional services. This will result in savings of RM1.6 billion.

“Second, defer the 2015 Program Latihan Khidmat Negara (National Service) to enable the programme to be reviewed and enhanced, with savings expected at RM400 million.

“Third, review transfers and grants to statutory bodies, GLCs, Government Trust Funds, particularly those with a steady revenue stream and high reserves. This measure will result in savings of RM3.2 billion.

“Fourth, reschedule the purchase of non-critical assets, especially office equipment, software and vehicles, with an expected savings of RM300 million.”

Najib said Putrajaya’s revenue would be enhanced by encouraging companies to register with the Royal Malaysian Customs to enable them to charge and collect the goods and services tax (GST).

He estimated that broadening the tax base would contribute an additional RM1 billion.

Putrajaya would also realise additional dividends from GLCs and GLICs as well as other government entities amounting to RM400 million, said Najib.

He added that the revisions to the budget were necessary as Putrajaya would otherwise face a revenue shortfall of RM8.3 billion due to falling crude oil prices, despite savings of RM10.7 billion after doing away with fuel subsidies.

“Without any fiscal measures, the deficit will increase to 3.9% of GDP against the target of 4% for 2015.

“This requires the government to take measures to reduce the deficit, in line with the government’s commitment towards fiscal consolidation.”

Najib said the GDP growth target between 5% and 6% had been revised to between 4.5% to 5.5%.

To ensure economic growth remained strong, he said Putrajaya would boost exports of goods and services, enhance private consumption, and accelerate private investment.

Among its strategies are postponing the scheduled electricity tariff and gas price hike, and increasing nationwide mega sales.

Meanwhile, Najib announced an initial allocation of RM800 million for the repair and construction of basic infrastructures affected by the recent floods, and another RM893 million for flood mitigation projects.

These included building eight-foot high stilt houses for those who have land and whose homes were damaged by the floods, and handing over 1,000 units of low-cost homes in Gua Musang, Kelantan.

As he concluded his speech, he told Malaysians the country was not in a financial crisis or recession, but simply taking pre-emptive measures.

“We are neither in recession nor a crisis as experienced in 1997, 1998 and 2009, which warranted stimulus packages.

“The strategies announced by the government are proactive initiatives to make the necessary adjustments following the challenging external developments which are beyond our control.

“This is a reality check following, among others, declining global crude oil prices,” he added. – January 20, 2015.

By ANISAH SHUKRY The Malaysian Insider

Focus on Malaysian-manufactured goods

PETALING JAYA: The impact of the reduction in global oil prices from US$100 to US$40 per barrel can be offset by a rise in demand for Malaysian-manufactured goods, said Prime Minister Datuk Seri Najib Tun Razak (pic) on Tuesday.

Najib, who announced revisions to the 2015 Budget which was tabled in October 2014, said that this could be done as crude oil only makes up 4.5% of the nation's total exports.

"The reduction in the price of crude oil will indirectly increase demand in Malaysia-made products. We will actively promote 'import-substitution' to reduce our dependency on external sources to obtain goods and services," said Najib.

He added that the Government initiatives would be created to increase the use of the private sector.

"We will give priority to local Class G1 (Class F), G2 (Class E) and G3 (Class D) contractors registered with the Construction Industry Development Board to carry out recovery works in their local areas affected by the east coast flood," said Najib.

He added that the Government would intensify promotions encouraging the public to buy made-in-Malaysia products.

"We will increase the frequency and duration of mega sales throughout the nation, and intensify domestic tourism promotions by offering competitive airfares," said Najib.

He also said that the Government would encourage the private sector to reap opportunities created by the Asean Economic Community.

"We will also intensify programmes to boost exports of Malaysian goods in 46 nations across Asia, Europe, the Middle East and America," said Najib.

In his speech, Najib said the adjustment to the 2015 Budget was necessary to "ensure our economy continues to attain respectable and reasonable growth, and development for the nation and rakyat continues" as the 2015 Budget was based on the price of crude oil remaining at US$100 per barrel.

"Based on a crude oil price of US$100 per barrel and taking government saving measures and retail price controls into account, the Government was expected to have a fiscal profit of RM3.7bil. However, with the current price of oil at US$55 a barrel, the government will lose RM13.8bil in income," said Najib.

By Tan Ti Liang The Star/Asia News Network

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Will shale oil survive the price fall?

American shale oil enterprise WBH Energy filed for bankruptcy on January 4, 2015. This could be the beginning of a shakeout of shale oil enterprises. Since 2010, the debt of America's energy enterprises has increased 55 percent; meanwhile, the energy sector of S&P 1500 index has dropped rapidly. The shale oil revolution has not only been stricken by the low oil price, but also "abandoned" by investors. As liquidity runs short, small and medium-sized shale oil enterprises will either go bankrupt or be taken over if they survive the oil price crisis.

The reason for the oil price slump is becoming clearer: oversupply. However, since oil producers will not reduce output, the downward trend continues. Canadian heavy crude has dropped below 35 USD, a new low since February 2009. In the past six months, the price has fallen by 60 percent. We can say that the shale oil revolution is being blocked by the low oil price - in other words, it is being hindered by OPEC (Organization of Petroleum Exporting Countries), principally represented by Saudi Arabia. When the oil price dropped below 50 USD, OPEC had a meeting seeking consensus on maintaining oil output. The average production cost of OPEC is about 40 USD, while the cost of shale oil is above 60 USD. As long as the price is above 40 USD, OPEC can still make profit, but the shale oil enterprises will be squeezed out.

At the end of 2014, in order to exploit the market for US oil producers, the US Department of Commerce lifted the ban on the export of condensate oil. The US has ended its 40-year oil export ban to join in competition with the other oil producers, which means that on the one hand the US has become an international oil producer, while on the other hand shale oil has had a huge impact on the world energy structure, and the world oil market has excess production capacity. For the US, shale oil has provided a new economic growth point and provided additional chips when competing with other oil producing countries. Therefore, the US government will offer necessary supports to shale oil enterprises. However, the market cannot be easily manipulated by one or two countries. The US wanted a moderate drop in the oil price, which would stimulate its economy as well as "fix" those insubordinate oil producing countries. But the downward trend of the oil price has been irresistible, and now threatens the survival of the American shale oil industry.

Faced with the falling oil price, shale oil enterprises, with their relatively high production costs, have entered a crucial phase of life and death. Unless all the oil producing countries join hands to limit production and achieve a rebalancing of supply and demand, the oil price will not rebound in the short term. Saudi Arabia and the other Gulf countries blame the oil price crisis on the irresponsible behavior of non-OPEC oil producing countries, which in fact targets the shale oil producers.

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A strategic game-changer, the Crude dynamics a new economic 'golden age' for USA likely?

A SEISMIC shift is under way in global affairs. At its most potent, this dynamic could conceivably upset the accepted wisdom of where the ‘centre of gravity’ of the world economy will lie two decades from now.

A recent report from the Paris-based International Energy Agency (IEA) predicts that by as early as 2020, the US could surpass Saudi Arabia as the world’s largest oil producer — and achieve complete energy independence by 2030.

The IEA forecasts that the US will increase its production to 23 million barrels a day (MMbd) in 10 years from total available supplies of around 10.3 MMbd currently. Oil and natural gas production in the US is increasing at its fastest pace in 50 years.

The IEA’s outlook on world energy has underscored what recent data have been pointing to: a perceptible decline in the dependence on energy imports for the US.

The US, currently the world’s largest oil consumer using 18.8 MMbd (roughly 22 per cent of global production), imported about 45 per cent of its petroleum (crude as well as products) in 2011. After peaking in 2005, the share of imports in US energy consumption has declined a full 10 percentage points (from over 55 to 45 per cent currently).

Contrary to popular perception, 52 per cent of these imports were sourced from the western hemisphere, with Canada, Venezuela and Mexico supplying 29 per cent, 11 per cent and eight per cent of the US petroleum needs.

Saudi Arabia, the second-largest supplier of oil to the US after Canada, accounted for 14 per cent of US petroleum imports in 2011. The wider Middle East/Persian Gulf accounted for 22 per cent of US petroleum imports in 2011, down by around 25 per cent since 2005.

The US has benefited from large domestic production gains, particularly in shale oil.

This has been made possible by technological innovation in oil drilling such as ‘hydraulic fracturing’ (or ‘fracking’) as well as the opening of hitherto off-limit geologically rich production areas such as Alaska and the Gulf of Mexico (drilling activity in the latter was temporarily halted by President Obama following the oil spill caused from BP’s rig).

What will this trend mean for the global economy? The virtual elimination of the US’s dependence on imported energy in the next one or two decades is being dubbed as a “strategic game-changer”. (The Wall Street Journal carried a piece with the headline ‘Saudi America’ in its Nov 12, 2012 Asian edition.)

According to influential commentators like Niall Ferguson, the celebrated financial historian and Harvard University professor, the abundant availability of indigenous energy could spark a new economic “golden age” for the US.

Uninterrupted supplies of relatively cheaper, and less price-volatile, fossil fuel could galvanise the US manufacturing sector into creating millions of new jobs.

With its productivity advantages, coupled with a gradual convergence of manufacturing wages between developed and fast-growing developing economies, the US could also start becoming attractive once again as a global manufacturing hub, according to Mr Ferguson.

Hence, rather than write off the US economy as a spent force, commentators such as Mr Ferguson believe quite the opposite: that the US will continue to economically rival, and possibly dominate, competitors such as China and India well into the supposedly ‘Asian’ century.

The replacement of imported fuel and the infusion of domestic energy in the US economy will have implications for the US dollar as well, according to this line of reasoning.

According to forecasts by Deutsche Bank, reduced energy dependence would cause the US current account deficit to fall 30 per cent by 2016.

By virtue of these developments, the value of the greenback will appreciate, which will provide an added impetus to declining world oil prices.

The possible reduction of geopolitical risk in global energy markets as a result of America’s energy ‘independence’ resulting in a weaning away from the volatile Middle East, could trigger a sharp reversal in the international oil price. (This scenario assumes, however, that Saudi oil production has not ‘peaked’ between now and then).

By some expert reckoning, the geopolitical risk in current oil prices ranges anywhere from $20 to $30 a barrel.

Such a large reduction in the oil price, should it occur, will exact a heavy toll on the budgets and economies of Middle Eastern oil producers.

Given their demographics, most of these countries will need to continue ‘pump-priming’ their economies for the next decade at least to create jobs and provide social safety nets.

The potential loss of oil income could be a devastating blow to their economies — and for millions of migrant workers who send billions of dollars in remittances to their respective countries.

The other major implication of these potential developments in global energy markets would be on food prices. If world oil prices do indeed trend down for the long run, it will remove the economic incentive for the push into bio-fuels.

This in turn will be welcome news for the world’s poor, as both the stopping of food diversion for bio-fuels combined with lower transport costs will make a significant dent in food prices.

However, if the US economy does not decline into irrelevance by 2030, and is in fact rejuvenated, the global competition for resources will be even more intense — pressuring not only the environment but also prices for non-oil, non-food commodities.

A fascinating global energy landscape is unfolding. Whatever final shape it takes, our continued dependence on energy from fossil fuels will ensure that oil will continue to play a major role in our lives for the foreseeable future.- Dawn/Asia News Network

 By Sakib Sherani
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

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