Falling Commodity Prices will affect Malaysian Economy

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Plummeting prices for oil and other commodities are dimming Malaysia's growth prospects and government revenues, sending Asia's largest oil-and-gas exporter's currency to over four-year lows.

Unlike other Asian economies, which are commodity importers and are set to benefit from the decline in global commodity prices through lower inflation, Malaysia relies on exports of oil, palm oil and rubber.

As such, Malaysia is highly susceptible to the fluctuation of raw material prices when compared to many of its neighbors in ASEAN. Further diversification into the services sector is needed to not only fix this problem, but to assure the growth of the Malaysian economy well into the future.

Investors pulled $2.5 billion out of Malaysian stocks and bonds in the last month, making it the only emerging Asian country to see outflows. The Malaysian ringgit is one of the worst performing currencies in the region, falling to a four-year low Monday against the U.S. dollar. The sliding oil price has changed the picture somewhat. Poor data Friday confirmed investors' worries about the economy and currency. Malaysia's current account surplus, a measure of trade in goods, investments and services, fell 53% in the third quarter from the previous quarter, driven by weak exports. Economic growth was 5.6% in the period, still solid but down from 6.5% in the previous quarter.

Credit Suisse group explains that low commodity prices can have an impact on the Malaysian economy in two different ways. “First, it reduces the disposable incomes of consumers, especially in the rural areas, and secondly, it lowers exports and the terms of trade, given Malaysia’s high exposure to a broad range of commodities,”

“The Malaysian government derives about 30% of its annual revenue from the oil and gas sector, mainly through national oil company Petroliam Nasional Bhd (Petronas). It had estimated crude oil prices to average at US$105 a barrel this year.” said the bank in a report. Credit Suisse mentioned that even just a 10% fall in oil prices would increase Malaysia’s deficit by 0.1% to 0.3% of GDP.

On a positive note, economists argue that the falling oil prices would not only reduce the subsidy burden for Malaysia, but it would also give further room for the Government to reform the current blanket subsidy scheme for fuel prices. CIMB Economics Research argues that falling oil prices may not be all bad for Malaysia’s economy. The institution points Malaysia can benefit from the recent fall in global oil prices, particularly if global demand is aided by higher discretionary incomes, which then feed into export demand.While CIMB Research acknowledged that Malaysia’s government oil revenue would be affected by weaker global oil prices, it argues that there would not be a real risk to the fiscal deficit target of 3% of GDP next year, given the stable dividends from Petronas. On the upside, the government’s subsidy savings can either be used to bring down the fiscal deficit or be channelled towards productive spending. Given Malaysia's high reliance on petroleum for revenue, Credit Suisse concurs, noting that if oil prices were to stay at around US$80 to US$83 per barrel on a sustained basis, the government’s petrol and diesel subsidy bill should be eliminated completely in 2015, even without further fuel subsidy reform by the Malaysian Government.

The price of RON97 petrol will go down by 20 sen to RM2.55 per litre from Wednesday. In a statement, the Finance Ministry said it had agreed that the retail price of RON97 petrol be reduced by 20 sen to RM2.55 per litre from Nov 19 (Wednesday). The price of RON95 petrol and diesel, which are subsidised by the Government, remains unchanged. On Oct 2, the prices of RON95 petrol and diesel went up by 20 per litre in an effort by the Government to rationalise subsidies. According to AmResearch, the breakeven of the global crude oil price is at an average of US$84.80 per barrel if RON95 were to remain at RM2.30 per litre without the government subsidy. Expecting if the global crude oil price continues to slide, would Malaysian Government possibly adjust the price of RON95 to reduce Malaysians’ burden?