KL budget revision may still fall short of compensating for oil price plunge

JUST three months after presenting his budget for 2015, Malaysian Prime Minister and Finance Minister Najib Razak has been forced into a reality check, mainly on account of the collapse in oil prices. On Tuesday, he unveiled a revised budget, including scaled-down projections for economic growth and slightly less sanguine forecasts for the fiscal deficit. The growth projection for this year has been pared to 4.5-5.5 per cent, from 5-6 per cent earlier, while the deficit target has been revised to 3.2 per cent of GDP from 3 per cent.

Given the roughly 50 per cent decline in oil prices over the last six months and the fact that oil-related revenues account for about 30 per cent of budgetary receipts, some revision of forecasts was called for. Mr Najib did the right thing, and in good time. The question is whether his new numbers are realistic and credible. There is reason to doubt this.

First, the revised projections assume oil prices at US$55 per barrel (compared to US$100 when the original budget was tabled). Oil is already trading below US$50 and at least for the foreseeable future, no turnaround is in sight. Credit Suisse estimates that every 10 per cent decline in oil prices reduces Malaysia's GDP growth by 0.2 percentage point. By this reckoning, a 50 per cent cut in oil prices would shave a full percentage point off the growth rate; 4-5 per cent rather than 4.5-5.5 per cent growth would therefore be more realistic.