January 21, 2015
I would like to address some concerns on the current economic developments and the Government’s financial position. Lately, there have been reports, concerns and queries on issues, such as crude oil prices and performance of the ringgit.The Government has been vigilantly monitoring the situation. In this regard, I will announce several proactive measures to realign our policies in line with the changing global economic scenario, which is beyond our control. We are undertaking this to ensure that we continue to achieve creditable growth.
In other words, I am here today to announce specific and proactive measures to align ourselves with the recent global economic developments.
We are not in crisis. Indeed, we are taking preemptive measures following the changes in the external global economic landscape which is beyond our control.
This is to ensure that our economy continues to attain a respectable and reasonable growth. And at the same time, we want to ensure development for the nation and rakyat continues.
Indeed, 2014 was a year of trials and tribulations for us due to several tragedies.
At the end of last year, Malaysia was hit by unprecedented floods, affecting several states including Kelantan, Terengganu, Pahang, Kedah and Perak.
Although the floods were not so severe in Johor, Sabah and Sarawak, local communities in some areas were affected.
Thus, it is said that while man plans, Allah SWT plans too. And Allah SWT is the best of the planners.
The Government has always done its best to plan, formulate and implement policies and measures for the betterment of the rakyat.
It has been three months since the 2015 Budget was tabled. The Budget was formulated based on; First, price of Dated Brent was forecast at USD100 per barrel.
Second, Gross Domestic Product (GDP) growth estimated between 5% and 6%. Third, a stable exchange rate of RM3.20 against the US dollar; and
Fourth, 2015 world economic growth was projected at 3.4% and 3.9% by the World Bank and IMF respectively. Since then, the World Bank and the IMF have revised global growth to 3% and 3.8% respectively.
It should be noted that Budget 2015 was formulated based on strong economic fundamentals in 2014. Therefore, the fiscal deficit was forecast from 3.5% in 2014 to 3% of GDP in 2015.
However, the external situation has changed lately and we are impacted directly as Malaysia is among the largest trading nations in the world.
Compared to the situation a few months ago, the global economic landscape has since changed significantly. This necessitates us to review and clarify some of our earlier macro and fiscal assumptions.
Among the issues raised is the Government’s ability to achieve its fiscal targets for 2015. Given the current situation, the question is whether the economy and Government’s financial position will be affected.
In this special address, I will explain to the rakyat and announce several measures to mitigate the current economic situation.
As a responsible Government, we will continue to ensure economic development and safeguard the well-being of the rakyat.
Declining Crude Oil Prices
We are aware of the concerns among the rakyat, business community and analysts over the impact of the sharp fall in crude oil prices on the domestic economy.
Over the last six months, global crude oil prices have plunged more than 50%, among others, due to oversupply amid weak demand.
Leveraging advances in technology, shale oil and gas output has risen significantly in the US.
The situation is exacerbated by higher output from non-OPEC (Organisation of the Petroleum Exporting Countries). OPEC is also not willing to undertake production cuts in order to maintain its market share.
The Government has consistently reiterated that crude oil prices are beyond its control.
The benchmark Dated Brent crude oil price has dropped to around USD48 per barrel on 19 January 2015. And analysts expect oil prices to take quite a while to stabilise.
Benefits of Declining Crude Oil Prices
Lower crude oil prices benefit net oil importing countries like Malaysia. For instance, the recent reduction in pump prices of petrol and diesel by 35 sen and 30 sen per litre, respectively will increase the overall disposable income of consumers by RM7.5 billion. Assuming that consumers spend 40% of this amount, it will boost private consumption by RM3 billion.
The World Bank estimates that lower crude oil prices will have a positive impact on world GDP. In fact, a 30% decline in oil prices could boost global GDP of up to 0.5%.
This bodes well for Malaysia’s manufactured products. Further, with the US economy strengthening, there will be sustained demand for our exports, in particular electrical and electronics (E&E) products.
Falling Crude Oil Prices will Reduce Federal Government Revenue
In contrast, falling crude oil prices will reduce Government revenue. The revenue is used for development purposes such as building of schools, roads and houses of worship. It is also used for other expenditures such as salaries of civil servants, cost of medicine in Government hospitals, agriculture subsidies and expenditure for security including armed forces, police and RELA.
In 2014, Dated Brent reached its highest level at USD115 per barrel on 19 June. Global crude oil prices have since plummeted by more than 50%.
Consensus among economists is that the forecast price of USD100 per barrel used in the 2015 Budget is no longer realistic. They now estimate the average oil price in 2015 to range from USD40 to USD70 per barrel.
The Government has therefore revised downwards its forecast for the average baseline oil price to USD55 per barrel for 2015.
Based on the crude oil price of USD100 per barrel, coupled with savings following the implementation of the managed float pricing mechanism for retail fuel prices effective from December 2014, the Government is expected to get an additional operating surplus of RM3.7 billion.
If crude oil price remains at USD100 per barrel, the Government will be able to accommodate all the measures announced in Budget 2015 with the fiscal deficit target not exceeding 3% of GDP.
However, at the forecast price of USD55 per barrel, there will be a revenue shortfall of RM13.8 billion.
If we compare the revised figures with Budget 2015 tabled in October last year, despite the savings of RM10.7 billion from the implementation of the managed float mechanism for retail fuel prices, the Government still faces a revenue shortfall of RM8.3 billion to accommodate the 2015 Budget measures.
Without any fiscal measures, the deficit will increase to 3.9% of GDP against the target of 3% for 2015.
This requires the Government to take measures to reduce the deficit, in line with the Government’s commitment towards fiscal consolidation.
Therefore, taking into account the revised estimates, we are revising the fiscal deficit target to 3.2% of GDP in 2015.
This is still lower than the fiscal deficit of 3.5% of GDP in 2014. In view of the external factors, we have to acknowledge that we may not be able to achieve the earlier fiscal target of 3% of GDP as announced. Of importance, is our commitment to continue reducing the fiscal deficit from 3.5% of GDP.
More importantly, we will not compromise on national development planning as it will enhance productive capacity of the economy. We will not neglect the rakyat’s welfare, particularly the bottom 40% of households.
Volatile Capital Flows and Ringgit
The fluctuations in the ringgit are influenced by developments in the global economy. Hence, the ringgit is not the only currency to have weakened against the US dollar. In fact, almost all currencies in the region have softened against the US dollar since September 2014.
The recent volatile capital flows and significant depreciation of the ringgit were also due to concerns over the impact of the sharp fall in oil prices on the Malaysian economy.
In relation to this, we must closely monitor the following:
First, the current account in the balance of payments must remain in surplus.
Second, continue with fiscal reforms and consolidation and
Third, economic activity must be further diversified to enable us to cope with falling crude oil and commodity prices.
The Government is confident that the exchange rate will over time adjust to reflect the strong economic fundamentals. Of importance, our financial system continues to function in an orderly manner.
Most importantly, there has been no disruption to financial intermediation, with lending activities continuing smoothly. Businesses continue to have access to financing from banking institutions and the capital market.
In essence, greater policy flexibility, adequate international reserves, deeper and more diversified financial markets, sound banking system and strong domestic institutional investors such as the Employees Provident Fund will increase resilience to volatile capital flows.
Current Account Balance
The current account balance is directly related to the import and export of goods and services.
We are a crude oil exporter. Thus, when oil prices plummeted recently, there was a perception that export receipts will also decline drastically and result in a current account deficit.
Indeed, this perception is not correct. As a net crude oil exporter, we had a surplus of RM7.7bil from January to November 2014.However, we are an importer of petroleum products with a net import bill of RM8.9bil during the same period.
If we include both crude oil and petroleum products, we are actually a net importer with a deficit of RM1.2bil.
Therefore, the perception that Malaysia is a large oil producer is also not true.However, if we factor in exports and imports of crude oil, and nett out petroleum products, then Malaysia is a net importer of petroleum. This does not include LNG, for which Malaysia is a net exporter.
Furthermore, we are still resilient as our diversified economy is able to weather the decline in oil prices.
With a better outlook for the global economy in 2015, the shortfall in commodity receipts is expected to be cushioned by increased demand for manufactured goods, such as electrical and electronic products, wood-based products, textile products and others, which account for 76% of total exports. Meanwhile, crude oil exports account for only 4.5% of total exports.
Therefore, the Government is confident that the current account will remain in surplus this year, although smaller in the range of 2% to 3% of Gross National Income or GNI. In 2014, the current account balance is estimated to record a surplus at 5.1% of GNI.
Strategies to Strengthen Economic Resilience
As I have explained earlier, there are several issues which will impact the domestic economy significantly. In the light of this, the Government will take measures to ensure economic growth remains on a strong trajectory. We are confident of achieving GDP growth in the range of 4.5% – 5.5% this year with the implementation of the following strategies:
– First: Ensure balanced, inclusive and sustainable economic growth;
– Second: Continue fiscal reforms and consolidation; and
– Third: Provide assistance to the rakyat and business community to rebuild infrastructure damaged by floods.
First Strategy: Ensuring Balanced, Inclusive and Sustainable Economic Growth To boost exports of goods and services, the following measures will be taken:
First, actively promote import-substitution services such as shipping, port, education and professional services. This will reduce dependence on foreign sources for procurement of goods and services;
Second, accelerate implementation of recommendations of National Export Council:
– Enable exporters, especially SMEs, to be connected to new clients in new markets under an international linkage programme using market linkers and industry specialists;
– Intensify export promotion programmes in 46 countries covering Asia, Europe, the Middle East and the US;
– SME Bank will introduce SME-Go, an export programme for SMEs; and
– Leverage the Services Export Fund (SEF) and promotional programmes for SMEs to enhance sustainability of projects abroad.
Third, frontload implementation of Logistics & Trade Facilitation:
– Improve last-mile connectivity to Port Klang including access road, railway network and traffic management system;
– Upgrade Padang Besar railway terminal;
– Improve operational efficiency of import and export processes; and
– Establish a hub and spoke system for air transport.
Fourth, intensify tourism industry;
Fifth, review levy on foreign workers; and
Sixth, waiver of visa fee for tourists from, among others, China.
To enhance private consumption, the Government will implement the following initiatives:
First, give priority to local class G1 (class F), G2 (class E) and G3 (class D) contractors registered with CIDB to undertake reconstruction works in their respective flood affected areas;
Second, intensify promotion of “Buy Malaysia” products;
Third, increase frequency and extend shopping hours of nationwide mega sales;
Fourth, accelerate promotion of domestic tourism through competitive domestic air fares; and
Fifth, encourage the private sector to leverage benefits from the establishment of the ASEAN Economic Community.
In efforts to accelerate private investment, the Government will:
First, set up a Services Sector Guarantee Scheme amounting to RM5 billion for SMEs in the services sector, with maximum financing of RM5 million and 70% Government guarantee;
Second, encourage GLCs and GLICs to invest domestically;
Third, reduce cost of doing business:
– Postpone the scheduled electricity tariff hike in 2015; and
– Postpone the scheduled gas price hike for the industrial sector in 2015.
Fourth, allocate 30% of the annual procurement budget of Government agencies and GLCs for goods and services to local SME producers; and
Fifth, increase local goods and services in Government procurement.
Second Strategy: Continuing Fiscal Reforms and Consolidation Among the revenue enhancement measures include:
First, broaden the tax base by encouraging companies to register with the Royal Malaysian Customs to enable them to charge and collect GST. This is expected to contribute an additional RM1 billion in GST collection. As at mid-January 2015, more than 304,000 companies have registered; and
Second, realise additional dividends from GLCs and GLICs as well as other Government entities amounting to RM400mil.
The Government will undertake the following expenditure rationalisation measures:
First, optimise outlays on supplies and services, especially overseas travel, events and functions and use of professional services. This will result in savings of RM1.6bil;
Second, defer the 2015 Program Latihan Khidmat Negara to enable the programme to be reviewed and enhanced, with savings expected at RM400 million;
Third, review transfers and grants to statutory bodies, GLCs and Government Trust Funds, particularly those with a steady revenue stream and high reserves. This measure will result in savings of RM3.2 billion; and
Fourth, reschedule the purchase of non-critical assets, especially office equipment, software and vehicles, with an expected savings of RM300 million.
- Third Strategy: Assisting the Rakyat and Business Community as well as Rebuilding Infrastructure Damaged by the Floods
The recent floods affected around 400,000 people nationwide. The latest estimate of damage to infrastructure is about RM2.9bil.
Among the measures that have been taken and will be implemented to assist flood victims include:
The Government has provided an initial allocation of RM500 million for rehabilitation works and welfare programmes for flood victims.
This is in addition to the existing allocation to the National Security Council, bringing the total to RM787mil.
Provide an initial allocation of RM800mil for repair and reconstruction of basic infrastructure such as schools, hospitals, roads and bridges;
Provide RM893 million under the 2015 Budget for flood mitigation projects;
Build 8-ft stilt houses for those who have land and whose homes were damaged by the floods; Hand over 1,000 units of completed low-cost houses in Gua Musang; Provide RM500 per flood affected household; and Provide RM5,000 for the next-of-kin who have lost family members.
For businesses affected by floods:
– Provide an additional RM100 million to TEKUN and RM100 million to AIM to provide soft loans to support SMEs and microenterprises.
BSN, Agrobank, SME Bank, TEKUN and AIM to defer existing loan repayments of up to six months.
Bank Negara Malaysia will establish a RM500 million Special Relief Facility for SME loan financing at a concessionary rate of 2.25% with a grace period of up to six months through banking and development financial institutions;
Bank Rakyat will offer a personal loan scheme of up to RM50,000 at a financing rate as low as 3.9%, while loan repayments will start after six months from loan disbursement;
A sum of RM500 million will be provided by financial institutions with a 70% guarantee under a Flood Relief Loan Guarantee Scheme (Skim Jaminan Pinjaman Bantuan Banjir) (SJPBB). The Scheme will be administered by Prokhas; and
Exempt levy payment to the Human Resources Development Fund (HRDF) for a period of six months for SMEs in the flood affected areas with effect from 1 February 2015.
To sum up, I would like to highlight 6 key take-aways:
First, we are neither in a recession nor a crisis as experienced in 1997/1998, and 2009 which warranted stimulus packages;
Second, the strategies announced by the Government are proactive initiatives to make the necessary adjustments following the challenging external developments which are beyond our control. This is a reality check following, among others, declining global crude oil prices;
Third, the current account balance is expected to remain in surplus;
Fourth, the financial markets remain orderly and resilient. Although the ringgit has depreciated, it is expected to stabilise over time to reflect the strong economic fundamentals;
Fifth, Development Expenditure of RM48.5 billion for 2015 will be maintained and spent.
This includes projects for the people economy such as public housing, flood mitigation, water supply, electricity and public transport infrastructure such as Pan-Borneo Highway.
In addition, projects such as the MRT Line 2, LRT 3, High-Speed Rail Kuala Lumpur-Singapore will be continued.
In May, I will table the Eleventh Malaysia Plan (11MP) to outline the development expenditure until 2020.
Sixth, Operating Expenditure is expected to be reduced by RM5.5 billion through reprioritising expenditure.
In concluding, let us pray and hope that Allah SWT will always assist us in our efforts to find solutions.
In all of human nature, to Allah SWT we submit and surrender to His will. Of importance, we stand together in solidarity to face challenges.
Surely, with every difficulty there is relief.Hopefully God Almighty will continue to protect our beloved country from harm and danger.
2015 Budget Revision: Need to focus of structural reforms
by Zurairi AR@www.themalaymailonline.com
Putrajaya needs to look beyond adjusting its annual deficit figures and focus instead on structural reforms to keep Malaysia’s oil-dependant economy afloat as the plunge in global prices continue to eat into government revenue, economists said.
The observers noted that a number of rating agencies have already given Malaysia’s sovereign ratings negative outlooks, and Prime Minister Datuk Seri Najib Razak’s Budget 2015 revision yesterday have yet to change their views.
Fitch Ratings even warned of a possible downgrade yesterday after Malaysia revised its fiscal deficit target to 3.2 per cent of the gross domestic product (GDP), saying the move is evidence that “dependence on commodities remains a key credit weakness for Malaysia”.
“It is more useful, in my view, to focus on the progress in the underlying structural reforms that underpin long-term fiscal sustainability rather than the year-to-year deficit figures,” said Dr Frederico Gil Sander, a World Bank senior economist who specialises on Malaysia.
Besides warning against a weak implementation of the Goods and Services Tax (GST) this April and a return of oil subsidies, Gil Sander also suggested that Putrajaya prepares budgets for years in advance for its ministries to enhance the credibility of its fiscal policy.
“Part of the deficit is currently due to the financing requirements of government-linked companies (GLCs), which are further crowding out private investment,” suggested Asian Development Bank’s (ADB) lead economist on trade and regional cooperation, Jayant Menon.
“The current looming fiscal crisis in Malaysia provides the perfect opportunity to seriously reduce the government’s involvement in the market by divesting from GLCs.”
Yee Farn Phua of Standard & Poor’s (S&P) said the credit ratings agency was more keen on watching long-term fiscal consolidation efforts from the Najib government, rather than just for 2015.
“We view Malaysia’s revised budget as an indication of the government’s continued focus on fiscal consolidation,” the agency’s associate director of sovereign ratings commented.
Najib announced yesterday that Malaysia’s revised fiscal deficit target for 2015 is now 3.2 per cent of the gross domestic product (GDP) instead of 3.0 per cent. Malaysia’s deficit for 2014 was estimated at 3.5 per cent of GDP.
Najib claimed that with the revenue shortfall from the global oil slump, the deficit would be as high as 3.9 per cent of GDP if the budget was not revised.
“We have to accept the reality that we can never achieve the original target of 3 per cent of the GDP as announced previously,” the Prime Minister admitted in his televised address.
He stressed, however, that Putrajaya was committed to reducing the budget deficit from the targeted 3.5 per cent in 2014.
Despite that, the economists said that yesterday’s budget revision was inevitable, and that Putrajaya must proceed with spending cuts as it still faces a projected revenue shortfall of RM13.8 billion.
The shortfall was calculated based on a forecast that crude oil prices would stay at US$55 (RM197.6) per barrel this year, compared to the initial estimate of US$100 per barrel that was used in the Budget 2015 announced last October.
As a crude oil exporter, Malaysia is highly dependent on petroleum income. Its oil-related revenue totalled RM63 billion in 2013, accounting for 29.5 per cent of total government income.
“There are several reasons why Malaysia cannot defer addressing its large budget deficit. International rating agencies will almost certainly downgrade Malaysia’s credit rating unless it appears to be addressing the deficit.
“Any downgrade will raise the cost of borrowing, as well as put further pressure on the ringgit,” Menon said.
Among the “big three” credit ratings agencies, Malaysia’s sovereign bonds’ outlook was last rated “stable” by S&P and Moody’s, but “negative” by Fitch.
“[We] view that reforms to attract private investments are insufficient and growth is being underpinned by increasing amount of government and household indebtedness,” said HSBC’s Asean economist Lim Su Sian.
Prior to Najib’s announcement yesterday, HSBC’s credit research team had already placed Malaysia’s sovereign on a negative outlook for 2015, according to Lim.
“Fiscal consolidation remains very important for Malaysia’s longer-term growth prospects as well as capital flows, and deferring those efforts now particularly at a time of increased global macro and financial market uncertainty would be foolhardy.
“The fact that Najib did not end up making any significant revisions to the 2015 deficit goal this morning suggests that the government is keenly aware that it needs to remain committed to its fiscal consolidation aims, in spite of the challenges,” Lim added.
In the Budget 2015 revision announced yesterday, Putrajaya insisted that there will be no cuts in the RM48.5 billion allocated to development expenditure, preferring instead to reduce operational expenditure by RM5.5 billion.
Putrajaya is also targeting an economy growth between 4.5 and 5.5 per cent this year, down from an earlier forecast of up to 6 per cent.
“Continuing on the path of fiscal consolidation is still the right policy so that Malaysia can continue to rebuild its fiscal buffers,” offered Gil Sander.
“The fact that 2015 will continue the consolidation trend, albeit at a slower pace, is positive.”