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.  

Crude Oil Prices Hit Fresh Five-Year Low

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Crude oil prices accelerated their six-month slide Monday, plunging to fresh five-year lows after a key investment bank bearclawed the energy market, a major producer slashed its drilling and exploration budget by more than 20% and fresh reports pointed to slowing global economic growth. Oil dived 4 percent to new five-year lows on Monday, as Wall Street expectations of a deeper price slump next year and a Kuwaiti prediction for US$65 crude set off one of the biggest declines this year. 

The 4% drop in crude oil prices crimped Wall Street, pushing the Standard & Poor's 500 Index down 0.7% to 2060 and igniting big losses among already hard-hit energy producers and oil patch stocks. The latest drop in oil is likely to fuel fresh cuts in gasoline prices in the weeks ahead, saving consumers, shippers and airlines billions. Oil prices have yet to find a bottom. The chief executive of Kuwait's national oil company said oil prices were likely to remain around $65 a barrel for the next six to seven months, the latest indication that Gulf producers are content to ride out the rout. The pessimistic outlook deepened the decline in a market that many traders see as a one-way bet for the time being.

“When these things go lower, they tend to go much farther than people anticipated,” said Tariq Zahir at Tyche Capital. “I definitely think we’re going to keep heading lower, everyone is trying to pick a bottom.” Oil prices have plunged for months as global supply growth has outpaced expectations while demand has been tepid. The Organization of the Petroleum Exporting Countries opted to maintain its production quota in November, disappointing some investors who had hoped the cartel would lower production to tighten global supplies.

Top exporter Saudi Arabia has resisted calls from poorer members to curb output and shore up prices that have slumped more than 40 percent since June. It is unclear how soon the price slump will slow the U.S. shale boom. The number of onshore rigs drilling for crude oil remains relatively high, and new U.S. projections released on Monday show production from the big three U.S. shale plays should carry on growing at over 100,000 barrels per day into January.

One of the biggest victims of oil’s price collapse is Malaysia, Asia’s top crude exporter, where the stock market is on track for its first annual decline since the global financial crisis and ranks as the region’s worst performer this year. The FTSE Bursa Malaysia KLCI has fallen 6.5% in 2014, the only market in Southeast Asia to record a loss for the year, as investors look instead to markets such as India and Indonesia and dump holdings in oil-related stocks. The ringgit has also suffered, dropping to 3.4470 per U.S. dollar on Thursday, its weakest level in nearly five years. Yields on 10-year government bonds have risen to 3.89%, from a 12-month low of 3.78% in mid-October. Bond yields rise as prices fall.

“Malaysia is one of the weakest markets within the region. In the context of drops, it is not very large. But relative to the traditional low beta of the market, it is a big move,” said Gan Eng Peng, head of equity at Affin Hwang Asset Management Bhd. in Malaysia, referring to a measure of volatility. The firm is selling out of oil-and-gas companies and moving into stocks that may benefit from lower oil prices. It is also increasing its holdings of cash to more than 20% in most of its funds, a high level for almost any manager.

It is unclear how soon the crude oil price slump will slow the global economy. Many companies are already starting to make deep cuts to spending for next year. It isn’t just oil prices that are contributing to the malaise in Malaysia. Maybank Investment Bank research, which covers 74% of the Malaysian bourse by market capitalization, calculates that core net profit for the companies it tracks contracted an average of 5.5% year-on-year in the third quarter.

Affin Hwang’s Mr. Gan said the only good news could be that nonoil-related stocks may be suffering more than is justified. However, with share prices down, oil prices lower and capital expenditures being cut, he expects more business and financial disruptions to come. “A credit crunch within the oil-and-gas space is a possibility,” he said.