Malaysia’s fiscal deficit to balloon in 2015 on back of oil rout

The deficit could widen further in 2016.

The Malaysian government estimates that the loss associated with oil revenues would cause the country’s fiscal deficit to rise to 3.9% of the GDP in 2015.

In a special address, Prime Minister Najib Razak highlighted that the economic situation had changed drastically, particularly concerning oil. Malaysia’s oil price assumption was changed from US$100/barrel to US$55/barrel, and growth estimates were reduced to 4.5% - 5.5% from 5.0% - 6.0%.

According to UBS Economist Edward Teather, the deficit in 2015 is not a big cause for concern. The deficit in 2016, however, is another matter entirely.

“It would be worrying if, in the event that oil prices do remain around 55 USD/barrel, Malaysia opted for a similar strategy in 2016. If oil prices remain at 55 USD/barrel in 2015 Petronas is likely to cut its dividend – possibly even further than the 17bn MYR it suggested while oil was at 75 USD/barrel. Uncertainty over revenue in light of today's action, which might be interpreted as unwillingness to cut back, will likely encourage currency weakness overshooting and, though alone it is unlikely to have a significant market impact, a ratings downgrade. Malaysia may need to reduce spending or raise revenue again in 2016 and efficiency gains won't cut it,” he stated.