Economists see big budget funded by debt

 

The low price of oil will place constraints on next year’s budget, say experts.

PETALING JAYA: Economists expect the government to announce a big budget today although the low price of oil will place constraints on it.

Yeah Kim Leng.

Yeah Kim Leng of Sunway University and Barjoyai Bardai of Universiti Tun Abdul Razak said the government will have little choice but to borrow more money to finance the country’s economic recovery.

“The low oil price will constrain the government from mounting a more aggressive and expansionary debt-financed spending,” said Yeah.

“It will likely stretch the deficit and debt levels to the higher end of the upper limits so as not to elicit a sovereign rating downgrade by international rating agencies.”

Crude oil is selling at below US$40 a barrel. Every dollar drop in oil prices sees Malaysia losing about RM300 million in revenue.

Barjoyai Bardai.

Barjoyai said the constraints were not likely to cause the government to hold back on continuing with stimulus measures in the Prihatin and Penjana packages.

“We will have big debts, but I don’t think it will affect our credit ratings as these are extraordinary times,” he said.

He told FMT he expected Putrajaya to avoid making the mistake the previous administration made with an oil price projection that was too optimistic.

“The 2020 budget was based on an oil price of US$62 a barrel, but the real price averaged at around US$40 a barrel,” he said.

“This time around, I do not foresee the government basing its budget on an oil price beyond US$45 a barrel as international analysts are predicting an average price of US$40 to US$46 a barrel.”

Renato Lima de Olivera of the Asia School of Business said the government could seek a sizeable dividend from Petronas but must do so with caution given the challenging outlook for the oil and gas industry.

Renato Lima de Olivera.

“We are currently in the last two months of the year and demand has not recovered yet,” he said. “In fact, new rounds of lockdowns across the world will further dampen oil demand.

“Besides, traders will want to offload all the accumulated stocks of oil bought at a bargain price in 2020.”

He said prices were expected to remain under the US$50 a barrel mark next year and that this meant oil and gas companies must carefully assess investment opportunities and use their resources to develop new capabilities in the renewable energy sphere or new fuels.

“They need to invest to secure their future in a world that is increasingly committing to reduce their carbon footprint,” he said.

“Diverting cash to pay dividends can risk the ability of companies to invest in these key capabilities for their long-term survival.” - FMT