Impacts of Oil Slump to Malaysian Economy and Shares

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Southeast Asian stock markets mostly drifted lower today as a sharp fall in global oil prices dealt a blow to energy shares. One of the biggest victims of oil's collapse is Malaysia, where stocks are set for their biggest slide since the global financial crisis and rank as Asia's worst performers this year. The FTSE Bursa Malaysia Index was dragged down by oil, gas and plantation stocks. The gauge has dropped 6 per cent from its 2014 high in July. SapuraKencana Petroleum Bhd., Malaysia’s biggest listed oil and gas services company by market value, fell 11 per cent, the most on record. Dialog Group Bhd., a contractor in the same industry, dropped 19 per cent in the steepest decline since November 1997.

Southeast Asian stock markets were mostly higher on Friday with Malaysian shares staging a rebound after hitting a 15-month low in the previous session on concerns over falling oil prices. Shares in oil products trader Petronas Dagangan Bhd rose 4.5 percent, extending gains after having hit their lowest since March 2011 on Tuesday. The ringgit hit a near five-year low as a rebound in oil failed to ease concerns over the impact of lower crude prices on the country, a net oil exporter and major palm oil producer. 

Malaysia's key stock index hit a fresh 15-month closing low on Thursday as the ringgit extended losses while foreign selling continued on concerns lower oil prices would hurt economic fundamentals in the oil exporting country. Most other Southeast Asian indexes edged higher in line with Asian stocks amid optimism about the US economy. The Kuala Lumpur composite index was down 0.3% at 1,752.86, having earlier hit 1,743.62, its lowest since September 2013. The fall sent the index into oversold territory, with its 14-day Relative Strength Index (RSI) slipping to 29.78. A level of 30 or lower indicates an oversold market.

Technical indicators pointed to a rebound in the near term but any strong gain would be capped by the weakness in the ringgit, broker Affin Hwang Capital said in a report. The ringgit lost 0.2% to 3.4470 a dollar. Shares of Tenaga Nasional and Kuala Lumpur Kepong were among the underperformers while shares of Petronas Chemicals Group jumped 3.6% to RM5.49 after a 6% drop in the preceding three days. If inflation stays low in Malaysia, as Credit Suisse says is likely, it would reduce the chances of an interest-rate hike by the central bank, which analysts say wouldn't want to risk further jeopardizing a slower rate of economic growth. That would make the ringgit a less attractive prospect than many other Asian currencies, while other central banks in the region contemplate raising rates.

In the past, oil revenues were estimated to contribute about half of all government revenues in Malaysia. The government has used oil revenues to fund major projects, such as the Petronas Towers, the country’s highly developed infrastructure, and other things. With oil revenues shrinking the government will have a tough time funding these projects. Now, oil revenues are believed to contribute about 14% of government revenues. The Malaysian government has worked hard to diversify its dependence on oil, but oil revenues are still extremely important for government funding. The situation is exacerbate by the fact that Malaysia has already been struggling to tighten its belt.

As Asia's biggest crude-oil exporter, Malaysia is first in the firing line for investors looking to insulate themselves from a slump in global oil prices. Brent crude oil futures, the global benchmark, are at nearly a five-year low of $70 a barrel due to falling demand and competition from other energy sources such as shale gas. Malaysia is already seeing a deterioration in its terms of trade. The current-account surplus narrowed to RM7.6 billion in the third quarter, the smallest gap since June 2013. A December 5 report may show the nation’s exports rose 0.2 per cent in October from a year earlier, according to the median estimate in a Bloomberg survey. That would be the smallest increase since a contraction in June 2013.