- Petronas is slashing dividend to the government. Malaysia's Petroliam Nasional Bhd (Petronas) is slashing its 2016 dividend to the government by nearly 40%, after its quarterly profit fell 91% on weak global crude oil prices. Due to higher asset impairments and net foreign exchange loss on USD borrowing, its net profit plunged 87% to RM1.4bil for 3Q15 from RM11.1bil in 2Q15. Petronas said on Wednesday it will pay RM16bil in dividend to the government next year, down from RM26bil in 2015.

- Brent crude oil will likely trade at USD48 per barrel next year. In 3Q15, Brent crude oil was trading at an average of USD50.26 per barrel, compared to USD101.85 per barrel during the corresponding period last year. Petronas assumes Brent crude oil will trade at USD48 per barrel next year, which is also the government’s projection for 2016. The government expects global crude oil prices to remain low at an average of USD50 per barrel in 2015, due to excess supply amid weak demand conditions.

- Weak exports of commodities. Other than that, we gather that Malaysia’s exports surged in recent months, driven by most major export products except commodities. Total exports grew by 8.8% YoY to RM70.2bil in September 2015. Overall, data for trade suggests healthy exports growth in 3Q15. Nonetheless, shipments of crude petroleum had contracted for eight consecutive months while exports of petroleum products continued to decline since August 2014. In September 2015, exports of crude petroleum and petroleum products fell by 12.2% and 10.1%, respectively.

- Oil-related revenue declines further in 2016. Also, the contribution of oil-related revenue to government coffers has fallen sharply in the recent years in tandem with the government’s effort to reduce reliance on petroleum income. Oil revenue had contributed RM65.5bil, which accounted for 41.3% of government revenue in 2009. As for 2016, the government had estimated Malaysia's oil-related revenue to amount to RM31.7bil (or -27.4% YoY). Also, the ratio of oil-related revenue to total revenue is expected to decline to 14.1% in 2016 (from 19.7% in 2015), on the back of weak global crude oil prices.

- Total government revenue is likely to grow by 1.4% YoY in 2016. Despite the reduction in petroleum revenue for 2016, total government revenue is envisaged to grow by 1.4% YoY to RM225.65bil. In terms of direct taxes, we note that petroleum income tax is expected to decline by 2.1% to RM9.3bil in 2016, from RM9.5bil in 2015. However, the YoY boost in revenue by RM3.2bil in 2016 is driven by the increase in direct taxes. In particular, the government anticipates higher corporate taxes (+RM6.1bil YoY), personal taxes (+RM2.1bil) and GST collection (+RM12.0bil).

- Fiscal deficit of 3.1% for 2016. The government is expected to strengthen its fiscal stance in 2016. Based on the official GDP growth estimate of between 4.0-5.0% and the total budget allocation of RM267.2bil (or 2.6% YoY) in 2016, fiscal shortfall is likely to register at 3.1%. To recap, the government’s medium-term fiscal framework highlights that the deficit level is targeted to be at an average of 2.7% of GDP between 2016 and 2018. The underlying assumptions for 2016 to 2018 include a real GDP growth rate of 4.5%-5.5% and crude oil price of USD48-60 per barrel.

Source: AmeSecurities Research - 13 Nov 2015