Najib walks the tightrope of fiscal prudence and economic activity

SQUEEZED by slumping oil prices, the Malaysian government has signalled that the country could miss its goal for a balanced budget by 2020, further derailing the crude-exporting nation's fiscal consolidation efforts.

Prime Minister Najib Razak indicated that the fiscal shortfall may be in the region of one per cent of gross domestic product (GDP) at the end of the decade, according to a Malaysian daily citing his comments to fund managers and investors in New York last week. The latest remarks mark an about-turn from his remarks in January this year, and again in April, that the government was intent on sticking to its goal to achieve a balanced budget in five years.

This should hardly come as a surprise. Oil prices, which began their descent in June 2014, have since fallen by 50 per cent while the small uptick in September has fizzled. That could be a lot to stomach for Malaysia which derives over 20 per cent of government revenue from oil-related sources. In January, the slump in oil prices had led the government to raise the country's fiscal deficit projection from 3 per cent to 3.2 per cent of GDP (versus 3.5 per cent in 2014 and 3.9 per cent in 2013).