Could oil price assumptions widen the deficit to 36–39% of GDP?

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Oil Price Fluctuations Could Significantly Widen Budget Deficit

Economists have warned that if oil prices fall below US$70 per barrel, Malaysia's budget deficit could expand to between 36 and 39 per cent of the Gross Domestic Product (GDP). This projection stems from a sensitivity analysis that considers the inherent volatility of commodity markets and the potential impact of a strengthening US dollar on oil prices. Such a scenario would represent a substantial deviation from the government's targeted fiscal deficit-to-GDP ratio.
Sensitivity Analysis on Oil Price Assumptions

Kenanga Investment Bank Bhd's economist, Wan Suhaimie Wan Mohd Saidie, conducted a sensitivity analysis specifically examining the impact of oil price variations on the national budget. This analysis was prompted by concerns that the Budget 2019's reliance on an oil price assumption of US$70 per barrel might be overly optimistic. The study indicated that a drop in oil prices below this benchmark could lead to a significant widening of the fiscal deficit.
Potential for a Wider Deficit

The prediction suggests that a decline in oil prices to levels below US$70 per barrel could push the budget deficit to a range of 36 to 39 per cent of GDP. This forecast is based on the understanding that oil revenue forms a crucial component of government income, and a sustained decrease in prices directly impacts fiscal projections. The fluctuating nature of commodities makes such assumptions particularly vulnerable to global economic shifts.
Factors Influencing Oil Prices

Beyond the general volatility of commodity markets, a strong US dollar was also identified as a factor that could exert downward pressure on oil prices. When the US dollar strengthens, oil, which is typically priced in dollars, becomes more expensive for holders of other currencies. This can lead to reduced demand and, consequently, lower prices. This interplay between currency strength and oil prices adds another layer of complexity to fiscal forecasting.

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Could oil price assumptions widen the deficit to 36–39% of GDP?

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