Oil output increase a potential bane
PETALING JAYA: Corporate Malaysia's fiscal position may come under pressure if the Organisation of the Petroleum Exporting Countries and its allies (Opec+) decide to further open the taps to boost oil output.
Although Opec+ has agreed for now to keep its output policy unchanged, analysts opined that another production increase of 411,000 barrels per day in July is likely, matching the additional output in May and June.
If the increase in oil output further gains momentum this year, it could put a strain on Malaysia's oil and gas (O&G) export earnings as the country is a net exporter of O&G, which could in turn impact its fiscal position and fiscal consolidation initiatives.
The lower oil prices coupled with US tariffs and global recessionary risks are seen as hurdles in Malaysia's fiscal consolidation landscape.
The government's oil price assumption for Budget 2025, announced last October, was set at US$75 to US$80 per barrel.
As at press time, the international benchmark Brent crude was down by 0.35% to US$61.88 per barrel.
Fiscal consolidation refers to government policies aimed at reducing deficits and debt accumulation.
It involves measures to balance government revenue with expenditure, minimising deficits, controlling public debt, and promoting sustainable economic growth.
Economist Anthony Dass told StarBiz that an increase in oil supply by Opec+ can add downward pressure on global crude oil prices.
He said Malaysia, as a net exporter, would experience a direct impact from a loss of revenue.
'While the exact scale of the Opec+ increase is still under discussion, potentially around 411,000 barrels per day in July, with more unwinding of cuts by November, any significant addition to supply, especially if it outstrips demand growth, will negatively impact Malaysia's O&G export earnings.
'Looking at the petroleum-related revenue, for every US$10 per barrel drop in oil prices, it is estimated to reduce federal revenue by RM2bil to RM3bil.
'Should global recession drag Brent crude down to US$65 to US$70 per barrel versus (the) US$80 to US$85 baseline, there would be a drop in petroleum-related revenue,' said Dass, who is the senior economic adviser at KSI Strategic Institute for Asia Pacific and a member of the SME Association of Malaysia's National Council.
The government aims to reduce its fiscal deficit from 5% of gross domestic product (GDP) in 2023 to 4.3% in 2024 and 3.8% in 2025. Dass is projecting Brent crude to hover at US$60 to US$65 per barrel this year.
HSBC Asean economist Yun Liu said the current oil price is lower than the government's oil price assumption of US$75 to US$80 per barrel as announced in Budget 2025 last October.
She said this may raise questions on energy-related revenue.
'But there are still a lot of moving parts of the fiscal consolidation plan. For example, we are still waiting for clarity on the sales and service tax (SST) expansion plan.
'It has reportedly been delayed for a month, so eyes are on any concrete plans to implement it. The other elephant in the room is the RON95 subsidy rationalisation.
'When and how it will be implemented will impact this year's fiscal plan,' Liu said.
HSBC chief economist for Australia, New Zealand and global commodities Paul Bloxham said he expects the oil price to be on a downward trajectory, with a forecast average of US$68.50 a barrel in 2025 and US$65 a barrel in 2026.
That said, he said he sees the upcoming Opec+ meetings as a downside risk to these forecasts, with a high chance that another accelerated supply hike will be announced for July.
'A key driving force for these decisions is expected to be lack of compliance with current quotas by some of the smaller Opec+ producing countries.
'The Opec+ members have also been encouraged by recent announced cuts to capital expenditure by US shale producers, and are expected to continue to aim to gain market share by putting downward pressure on prices.
'There are limited upside risks to the demand for oil, with the key challenge being the global economic slowdown that is underway due to the trade policy shock.
'The upside risks are mostly related to possible supply shocks. These include potential disruption to supply from Venezuela and Libya, and risks of a rebound in supply from Iran, given the risk that an Iran-US nuclear deal does not arrive,' Bloxham noted.
Juwai IQI global chief economist Shan Saeed said with Opec+ increasing output, global oil prices might face downward pressure in the short run and recover sooner than expected.
He said Malaysia relies significantly on O&G earnings for its fiscal plans and can move smartly to generate revenues from other sources.
Increasing the GDP size is a proven strategy to enhance the revenue base and consolidate the fiscal position to bolster the balance sheet of the government, he said.
'We expect Brent crude oil prices to move into two phases in the short and long run. In the short run, we expect the price to be around US$64 to US$67 per barrel.
'However, in the long run it is expected to trade at US$77 to US$83 a barrel based on a few factors.
'They include geopolitical risks, US dollar debasement, supply disruption from shale gas myth, and Opec+ production cuts,' Shan noted.
US dollar debasement means the depreciation of the dollar due to the Federal Reserve (Fed) cutting interest rates.
Shan anticipates the Fed will start cutting rates from July of this year onwards.
He said the greenback has already depreciated 8% year-to-date, and foresees it to further depreciate upon the Fed cutting rates.
Malaysia, according to Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, has been recording trade deficits in crude oil for the past three years.
Last year, he said the trade deficits stood at RM37.1bil on the back of total exports and imports of RM26.1bil and RM63.2bil respectively.
'On that note, the contribution from O&G-related revenue to the government is going to be increasingly challenging.
Not to mention that Petroliam Nasional Bhd may also need to allocate more capital expenditure for developing the renewable energy space and its overseas investments.
'In a nutshell, the government's revenue stream is expected to be more challenging, leading to more discussion to have other revenue streams to ensure the sustainability of the government finances,' he said, adding that he is projecting on the average for Brent crude to be at US$67 to US$68 per barrel for 2025.
Mohd Afzanizam said on the whole the government has done well in managing its fiscal position.
The first quarter of financial year 2025 (1Q25) fiscal deficits have been narrowed to 4.5% of GDP from 5.7% in the same period last year, he said.
The upward revision in the service tax from 6% to 8% on March 1, 2024, has led to a 30.3% growth in SST collection in 1Q25 and the diesel subsidies rationalisation on June 10, 2024, has resulted in the decline of subsidies and social assistance expenditure from RM16bil in 1Q24 to RM12.9bil in 1Q25, he said.
'I suppose the fiscal consolidation momentum needs to be maintained and the communication will always need to be improved in general in order to get the total buy-in from the masses.
'It's also about the mechanism where it should be easily implemented where the general public can see the positive outcome almost immediately,' he said.
OCBC Asean economist Jonathan Ng said the bank has revised its 2025 oil price forecasts downward, with West Texas Intermediate and Brent crude projected to average US$63 per barrel and US$67 per barrel respectively – about US$13 per barrel lower than the average oil prices in 2024.
He said the reasons for the downward revision are predicated on slowing global economic growth amid uncertainties in global trade policies and higher-than-expected oil supplies from Opec+ countries.
As to the positive growth drivers for the oil market this year in the current environment, Ng said an escalation in geopolitical tensions in Eastern Europe (for example, the Russia-Ukraine war) and the Middle East could lead to the implementation of further sanctions on the Russian and Iranian energy sectors.
As a result, he said the supply disruptions are likely to support higher oil prices in the short-term, given the reconfiguration of trade flows.
To strengthen the government's fiscal position in the short term Dass said, among others, there is a need to accelerate targeted cash aid for vulnerable groups and micro, small, and medium enterprises, fast-track high-multiplier development projects (especially in digital, green, and transport), and improve targeting of fuel subsidies to reduce fiscal leakage.
Over the medium term, he said the government needs to continue fiscal base broadening: e-invoicing and subsidy rationalisation, maintain fiscal discipline to avoid rating downgrades (currently A–/A3 with stable outlook), and reaffirm fiscal consolidation roadmap and medium-term fiscal framework.
To boost Malaysia's revenue and have a better grip on its fiscal consolidation, HSBC's Liu said the country should consider raising the tax coffers.
'Its tax receipts amounted to around 12% of GDP, lower than those of peers, so there's still the potential to raise the tax coffers.
'In the absence of a reintroduction of the goods and services tax, the tax tweaks and measures are necessary to boost fiscal coffers,' she said.
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