Poorer economic conditions likely to hit government budget

Petronas’ profit before tax has slumped by about 43 per cent so far in the current financial year and this is bound to have an effect on government revenue and Petronas’ own reinvestment plans.

In fact, profit before tax was almost halved in the second quarter compared to the same period last year while cash flow from operating activities dropped by a third.

Petronas accounts for RM26bn of the government’s annual budget. So far, the national oil company has contributed RM13bn to the government this year. But it is going to be tight for both Petrona and the government budget with slumping commodity prices.

This is what the Petronas CEO had to say:

I do not expect our cash flow from operations this year to meet our capex and dividend commitments. This means we will have to persevere through with more austerity measures, and will have to draw on our cash reserves.

And income tax collections are expected to fall as well. Where does that leave the government budget?

This excerpt from the Asia Sentinel spells out why the coming year is going to be tough for us.

In the current fiscal year, Petronas contributed RMB26 billion to the budget, with another RMB26 billion taken from the Petroleum Development Tax, for a total of RMB52 billion from Petronas reserves. Officials are privately forecasting that because of the collapse of oil prices, the two funds will contribute only RMB10 billion each, leaving a shortfall of RMB30 billion.

Tax collections fall sharply

According to in-house figures, income tax collections are expected to fall by 20 percent to 30 percent from RMB160 billion in fiscal 2014, a drop of another RMB30 billion to RMB50 billion owing to weak consumer sentiment and the slowdown in business activity. Operational expenditure for Fiscal 2015 is approximately RMB230 billion.

“They can’t reduce it unless they begin to cull civil servants,” a well-placed business source told Asia Sentinel. “The deficit is 52 percent, with off-balance-sheet contingent liabilities another RMB18 billion. That’s like Italy and Spain and we haven’t taken into account 1MDB yet. How are they going to borrow? The ratings will be horrendous next year and cost of borrowing very high given Malaysia’s junk status. I fear they will start selling crown jewels, such as assets in government companies.”

According to Bloomberg and Reuters, 45 percent of bonds are held by foreigners, who are likely to bail out and redeem them as soon as they come to term. The bonds are spread over several years, so the foreign redemptions are not expected to pose an immediate problem. But domestic redemptions may well be. Some RMB33 billion in bonds are expected to come due in the next quarter. There is no reason to believe domestic investors in government bonds are going to be any more enthusiastic about them than foreign investors, although a significant proportion are probably held by government-linked companies that can be jawboned into renewing them.

I think this goes to show the following:

• We need to wipe out corruption and croynism and plug leakages to reduce the fat in government spending.
• We cannot rely much longer on Petronas to support government revenue and our energy requirments. It is time we looked more seriously at renewable energy sources.
• What have we got to show for all these years of oil revenue and Petronas surpluses? How much really is there in our national oil wealth fund? Instead, what we have are staggering amounts unaccounted for in 1MDB (which, if we need reminding, started off as a sovereign wealth fund for strategic investments to be funded by future oil revenue).