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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?
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