We should ‘think carefully’ before dismissing oil price slump, warns Dr M
(Malay Mail Online) – Malaysia should not treat lightly the effect that the plunge in global oil prices will have on the economy, Tun Dr Mahathir Mohamad said today, joining critics in questioning Putrajaya’s nonchalant attitude towards fears of a looming fiscal crunch.
The country’s longest serving former prime minister, in a veiled criticism of the current administration, said Putrajaya needs to explain its reasons for maintaining its deficit targets, even though the oil price slump would likely affect government revenue and cause a budget shortfall for 2015.
“Unless the government cuts its spending, the deficit must become bigger. The claim that it will not increase the deficits need to be explained,” he wrote in a latest blog post.
Dr Mahathir pointed out that when Budget 2015 was tabled, its predicted allocations for government expenditure and revenue had been premised on the price of oil being at US$110 (RM380) per barrel.
But global oil prices have since plummeted to as low as US$70 (RM240) per barrel, the former Umno president said, noting that this would largely affect Petronas’ contributions to federal coffers.
The lower price of oil will most likely affect the likelihood of oil producers paying their obligations, as they now have to sell more in a weak market, he said.
Profits at Petronas will plunge, denting the amount it pays in taxes to the government, he added.
“Will Petronas contribution remain the same when it earns less from sale of oil, LNG and gas?” he asked.
Despite the oil price slump, Putrajaya is insisting that it could meet its target of reducing its budget deficit to 3.0 per cent of gross domestic product next year despite pressure from tumbling oil prices.
Last Tuesday, Finance Minister II Datuk Seri Ahmad Husni Hanadzlah said the deficit targets for 2014 and 2015 remain in place, although this depends on a final decision on Petronas’ payments to the government.
State oil company Petronas, which accounts for most of the government’s revenue from oil and gas, warned on Friday, however, that its various payments could fall by 37 per cent next year if oil stayed at around US$75 (RM256.88) a barrel.
Amid these concerns the ringgit suffered one of its worst drops since the 1997/98 Asian financial crisis.
For the week that just ended, the ringgit declined sharply against the US dollar to 3.4695/4725 from last Friday’s 3.3810/3840, according to a Bernama report today quoting Hong Leong Bank.
Taking these concerns into consideration, Dr Mahathir said Putrajaya may have to consider slashing expenditure, which would, in turn, cause businesses to suffer.
Profits would then go down and along with it, taxes. Government revenue would similarly have to decrease, the former prime minister said, due to the reduction in spending all around.
If fuel subsidies were not dismantled, pump prices would go down, although the capacity to subsidise would be lowered due to smaller contributions from Petronas, Dr Mahathir continued.
But now without subsidies and under Putrajaya’s new managed float system for fuel, pump prices are about the same or may even rise as the ringgit weakens.
“I think,” Dr Mahathir said, “we should think carefully before we comment on the oil price.”
