Economists see no need for budget review yet despite drop in oil price

PETALING JAYA: Despite the steep drop in oil prices over the course of a month, economists say there is no need yet for the government to revise its budget base on US$72 per barrel or the initiatives contained within the 2019 Budget.


Crude oil prices have dropped from US$81 per barrel on Oct 16 to US$66 yesterday, causing some concern over the 2019 budget which was based on the price of US$72 per barrel.


Sunway University Business School’s Yeah Kim Leng and Universiti Tun Abdul Razak’s Barjoyai Bardai told FMT it was too early for a budget revision, as the fluidity of oil prices was fuelled by several temporary factors.

However, both said it was important for Putrajaya and PETRONAS to monitor oil prices and have mitigation measures in place, ready to be rolled out.

Yeah said the fall in crude oil prices from US$81 per barrel on Oct 16 to US$66 yesterday could be attributed to softening demand amid the rising supply of US shale oil.

“This has to be weighed against the Saudi Arabian government’s intention to cut production by a million barrels a day to shore up prices, with US$70 a barrel seen as a sustainable level.

“Potential supply disruptions in strife-torn oil-producing countries, and the US’ sanctions on Iran, could well reverse the current downward trend.”

But Yeah said the uncertainty over oil prices would remain, which meant that there was a need for mitigation measures to meet any shortfall in revenue due to falling prices.

“These measures would include a supplementary budget to cut or delay spending and offset oil revenue loss with other sources such as the sale of assets or increased borrowings through the bond market.”

Barjoyai said it was more likely that prices would go up than drop below US$50 given that Saudi Arabia was set to reduce its output.

He said the recent fall in oil prices could also be attributed to speculation that the US Federal Reserve would raise interest rates, which pushed those who invest in crude oil for speculative purposes to opt for investments in other financial instruments such as bonds.

“To me, Finance Minister Lim Guan Eng does not need to revise the budget base or initiatives now, but perhaps adopt a continuous budgeting system and look at the budget each month and make adjustments.

“Some of the expenditures or initiatives he budgeted for which have not been spent can be postponed. This will allow the government to revise the budget downwards according to its needs.”

However, Barjoyai said if the oil price dropped further, it would affect PETRONAS’ ability to pay out dividends to the government.

Meanwhile, Institute for Democracy and Economic Affairs economist Adli Amirullah said the government should have a range of expected oil prices for the year and the difference in margins so that it could adjust the budget accordingly if oil prices dropped.

“As long as the oil price does not differ significantly with the estimated price in the budget, we should be relatively fine. It’s just that our budget deficit will be larger.”

Source: Free Malaysia Today

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