Economic headwinds put Malaysia's government in tough spot to bolster state earnings

KUALA LUMPUR - Malaysia's economy is in for a rough ride with multiple headwinds hitting it like a typhoon.

With a new shaky government in place, the Perikatan Nasional (PN) administration now has to navigate managing state finances through crashing oil prices and an adversely disrupted market due to the coronavirus outbreak.

Faced with limited options, economists warn that government revenue and fiscal consolidation would likely suffer this year.

Prime Minister Muhyiddin Yassin's announcement of a government lockdown has already placed further strains on the markets, with the local bourse further dipping beyond its 10-year-low, closing at 1,256 points on Tuesday (March 17).

The ringgit also continued to slide, trading at 4.331 against the US dollar, a far cry from its 4.089 against the US dollar during end-2019.

"The government has to reassess overall fiscal position given the current oil prices and having to step up spending to counter impact of Covid-19 in the midst of an imminent risk of global recession," said Mr Lee Heng Guie, executive director of Socio-Economic Research Centre.

The necessity to boost consumption through government spending in times of adverse market conditions is expected to raise fiscal deficit beyond the current revised projection of 3.2 per cent in 2020.

Oil prices have lost more than half its value since December last year, trading at less than US$30 (S$42.8) per barrel on Tuesday, a nosedive from US$66 per barrel.

Malaysia's state revenue is dependent on oil prices through its control of oil conglomerate Petronas.

Late last month, the company said it had no plans to issue a special dividend to the government, sticking with its commitment of RM24 billion (S$7.8 billion) to the federal administration in 2020.

Not everyone is confident that a special dividend can be ruled out entirely.

 
 
 
 

Economics professor Yeah Kim Leng of Sunway University said: "Depending on how severe the pandemic pans out in Malaysia, how much more stimulus is needed and how the government intends to cover the revenue shortfall may include calling upon Petronas for a special dividend contribution."

This year's contribution is based on last year's oil revenue, which means Tan Sri Muhyiddin's administration will face a huge challenge in drafting next year's budget given constrained state earnings.

Mr Lee said: "The government has room to look at non-administrative budget, namely the state-owned companies, but options are limited."

Unpredictability remains, given that the country's RM20 billion economic stimulus package to tackle the effects of Covid-19 was announced by former premier Mahathir Mohamad less than a month ago, when Brent crude was trading at US$52 per barrel.

That scenario has vastly changed, just as has Malaysia's politics.

Tan Sri Muhyiddin announced a further RM620 million worth of additional measures into his predecessor's package in the hope that the government expenditure would keep businesses moving and investors optimistic towards the country.

"We all take into account our fiscal policy that accommodates sectors that need to be supported. There is a lot more to be looked at," Mr Muhyiddin said at a press conference on Monday, assuring businesses that the fledgling new government "understands" their concerns.

"The Covid-19 issue is transient in nature. It would last awhile but I do not think it would last forever," he said. "We are doing something about it now".

Economists say that with little room to manoeuvre to increase state revenue, the government may consider re-implementing the Goods and Services Tax (GST).

The GST was first introduced by former premier Najib Razak in 2015 in a bid to raise government income but received brickbats from the public already burdened by the high cost of living.

 
 
 

It was later abolished in 2018 after the Pakatan Harapan government took power.

"It was not palatable to voters in the last election, and would require strong political vision to do it. But it can provide a buffer," said Mr Lee.

Otherwise, if the government has to dig deeper into its own pockets instead of sourcing funds from state-owned companies such as Khazanah Nasional or the pension agency Employees Provident Fund, one option as a last resort would be to use money from the National Trust Fund, said Mr Lee.

But at the moment, the Muhyiddin administration appears to be getting additional income from petroleum sale to Malaysians.

With oil prices having dropped drastically in the past fortnight, the sale of RON95 has not decreased in parallel with global prices, with the government having floated the weekly price on March 7 and 14 at RM1.89 and RM1.82 per litre respectively.

The move has led to speculations that the government implemented fuel floor price without announcing it.

Just a week ago, Domestic Trade and Consumer Affairs minister Alexander Nanta Linggi said the administration is considering setting a floor price for petrol and diesel.

Economics professor Yeah said given the current state of affairs, "it is desirable to maintain a floor price, and fuel tax goes into a stabilisation fund".

"Currently keeping the pump price above world price will contribute to the government's coffers. It can help to close the revenue gap that is expected to rise further with the enlarged stimulus package," Dr Yeah added.