Malaysia's GDP forecast TRIMMED as global oil prices slump

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The country's second finance minister said on 2 December that Malaysia is sticking to its target of reducing its budget deficit to 3.0 percent of gross domestic product next year despite pressure from tumbling oil prices. However, some economists are trimming the gross domestic product (GDP) estimates next year from 5.3 per cent to 5 per cent in view of the rapid plunge in crude oil prices and lower trade surplus. There is also the possibility that the Government may not meet its 3 per cent fiscal deficit target. Fearing that would blow a big hole in next year's budget, which forecast oil prices would be around $105, investors have dumped Malaysian shares and the ringgit, which suffered one of its worst drops since the 1997/98 Asian financial crisis.

With big oil producers battling for market share and global economic growth slowing, economists aren't sure how far oil and gas prices will fall, or how long they will remain at multi-year lows.  “Malaysia is the only Asian country that really doesn’t benefit from lower oil prices,” said Mitul Kotecha, the Singapore-based head of Asia currency strategy at Barclays Plc. “Being a net exporter of oil, Malaysia suffers more than others.” Oil-related industries account for a third of Malaysian state revenue and each 10 percent decline in crude will worsen the nation’s fiscal shortfall by 0.2 percent of the gross domestic product, Chua Hak Bin, a Bank of America Merrill Lynch economist in Singapore, wrote in an Oct. 22 report.

Brent crude fell to a five-year low below US$66 (S$86.86) per barrel yesterday due to an oversupply in production. Two economists told StarBiz that they have reduced their forecast from 5.3 per cent to 5 per cent while Maybank IB Research said in a note yesterday that it was reviewing the real GDP forecast of 5.2 per cent for next year and could revert to its previous projection of 5 per cent. Malaysian palm oil futures dropped to their weakest in nearly a week on Tuesday, as plunging crude oil markets and falling soy prices stoked worries that buyers could shift food and fuel demand away from palm. Palm oil as major income of Malaysia, the fall of price will absolutely affect the GDP for the coming 2015. 

AllianceDBS Research, on the other hand, maintained its forecast at 5%.

The country's domestic demand is also on a downtrend due to various factors like lower private investment, which fell to a single-digit growth, and cooling measures in the property sector. An RHB Research economist said: “We expected a slower economic growth ahead from a high-base but the slowdown seemed worse than we initially expected.” 

“Some of the investments in machineries and equipment to build infrastructure had been imported and captured (in previous year’s financials). Hence, we may not be seeing the same magnitude of private investment (looking) ahead.”

Following Petroliam Nasional Bhd’s plan to cut capital expenditure by 15% to 20% next year, he expects lower investments from the oil and gas sector as well. He opined that many investors overreacted after a slew of negative news but on the flip side, high-cost oil producers would cease production, which would lead to lower supply. With that, oil prices could strengthen, as the movement was very dynamic, he added.

An economist from AffinHwang Research said despite a more subdue outlook, the fundamentals of the Malaysian economy is still intact, supported by healthy private consumption and private investment.