Recently, The Edge, through its regular updates on Malaysia's current economic conditions has highlighted that Malaysia's revenue consists of up to 47% from petroleum or petroleum-related exports. Well, according to official estimates from the Ministry of Finance (Estimates of Federal Government's Revenue for the Year 2014), some of the important figures are summarised below:
Total revenue:
RM 224,094 Million + RM150 Million (additional revenue from measures announced in Budget 2014) = RM224,244 Million
Petroleum income tax:
RM 28,275 Million (based on average crude oil price - Tapis of USD 110.00 per barrel in 2014)
From the above, it can be seen that a sizeable portion of Malaysia's revenue is from petroleum income tax alone which is approximately 12.6% of total revenue.
Based on 2014 budget, the total allocation of RM 264.4 billion translates to fiscal deficit of 3.5% of GDP (revenue of RM 224.2 billion and GDP of RM 1154 billion - backcalculated based on fiscal deficit of 3.5%) or deficit of RM40.2 billion.
As can be seen above, the petroleum income tax forecasted for 2014 is based on average crude oil price - Tapis of USD 110.00 per barrel in 2014. As such, it would be interesting to take a look at historical oil price shown below:
From the above, it can be seen that the current oil price is near its historical high (nominal price) and it is also high after adjusted for inflation. The current high oil price is not expected to persist and in fact, the current commodities boom is known as the commodities super cycle and the high price is attributed to demand from emerging markets such as China, India, etc. However, recent data from China and other emerging markets have indicated that the stratospheric growth rate of early 21st century is a thing of the past and growth is expected to moderate. In addition, the production of crude oil in US is on an uptrend (chart below) due to the discovery of shale oil and this will have an impact on oil prices simply because US is the top consumer of oil in the world (refer table below).
As such, assuming crude oil price moderates to USD60 per barrel, that would translate to Tapis oil price of approximately USD70 per barrel (assuming USD10 premium for Tapis over crude oil). This would be mean a drop of about 36% from the assumed price of USD110. Using back of the envelope calculations, this drop of about 36% would translate to RM10 billion reduction from petroleum income tax alone. The actual reduction is expected to be even higher because the estimated revenue for 2014 is expected to decrease by 7% due to a reduction of Tapis oil price from USD115 per barrel in 2013 to USD110 per barrel in 2014 which is equivalent to a drop of approximately 4%. So, a drop of 4% in oil price translates to a 7% reduction in petroleum income tax and therefore, the RM10 billion reduction calculated above is conservative.
The reduction of oil prices would also of course reduce our government fuel subsidy and if oil prices were to reduce to USD60 per barrel, the government would probably save about RM2-3 billion after taking into account the recent price hike.
Note: EPU reported subsidy of RM2.4 billion based on average WTI crude price of US25.24 per barrel in 2001. In 2004, the subsidy is RM4.8 billion based on the average international oil price of US41.60 per barrel (Source: http://www.epu.gov.my/c/document_library/get_file?uuid=f438db0e-8106-489b-ac5e-2ee3f04d2575&groupId=283545)
So, the savings from reduction of subsidy is far less compared to reduction from revenue and let's not forget that we are only looking at petroleum income tax which is only 12.6% of total revenue. As mentioned earlier, other petroleum related revenue contributes up to 47% of Malaysia's total revenue.
As such, I am not entirely convinced that Malaysia will be able to achieve the reduction in fiscal deficits as highlighted in the recent budget. If oil price starts to go down, our fiscal deficits will go up as well and just the RM 10 billion reduction in petroleum income tax will results in our fiscal deficits going up to about 4.3% (from target of 3.5%). The deficits would be significantly even higher if other reductions in petroleum related revenue are taken into consideration.
Therefore, I would urge fellow Malaysians to look at oil price carefully and not to celebrate if oil price were to go down as we would not be able to enjoy the cheaper oil price if the economy is not doing well. If our fiscal deficits go up, our credit ratings would also be downgraded and borrowing costs would also go up and that would be really painful for the country. That is why some countries such as Norway actually save up on excess revenue generated due to high oil prices in order to prepare for rainy days. I hope my analysis is wrong and we would continue to be prosperous and live happily.
p.s. Other pieces of news recently which seems to reinforce my view that our country's finances are not well-managed:
1. 24th March 2014 - Additional RM2 billion sought for additional expenses.
2. I also noticed that one of the revenue stated in the Ministry of Finance's estimate is securitization of government employees' loan which translates to a "revenue" of RM4.2 billion. To me, this just means we are borrowing more money now to spend. Don't seem to me to be a prudent move.
