SINGAPORE: The plunge in oil prices that spurred a currency crisis in Russia and endangered Venezuela’s leadership is also roiling markets in Malaysia, a net oil exporter in Southeast Asia. Economists say it’s not time to panic, yet.
For one thing, Malaysia’s oil and gas products account for about 22 per cent of its exports, compared with more than 70 per cent for Russia’s energy.
For another, Prime Minister Datuk Seri Najib Tun Razak is buying some fiscal breathing room by abolishing decades-old energy subsidies and introducing a six per cent goods and services tax in April, according to Nomura Holdings Inc.
That would allow Najib to keep close to his budget goals even as declining investor confidence pushed the currency this week to its lowest level since April 2009 and boosted the cost of insuring the nation’s debt.
“Unless oil prices fall significantly further from here, our view is the pressures can be manageable,” said Euben Paracuelles, a Singapore-based economist at Nomura.
“Thanks to the few steps that they’ve already taken in the last two or three years, I think they should be able to respond effectively.”
Najib will hold a special session to talk about economic developments and the country’s financial position on January 20, the finance ministry said.
With crude prices at half the level of a year ago, the pressure will be on him to accelerate the restructuring of an economy grappling with a cash squeeze and elevated household debt and further reduce the nation’s dependence on oil.
“The oil-price slump does underline the importance of pressing on and perhaps hastening some of the fiscal reforms,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “Najib has some room to breathe, but he will do well to announce forward plans.”
While Najib has cut the budget deficit as a percentage of gross domestic product every year since he came to power in 2009 and reduced the government’s dependence on hydrocarbons, oil and gas still make up about 30 per cent of state income, according to Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp.
“Arguably, they should have done more in terms of reducing the dependence on oil even more or introducing the GST even earlier,” said Wiranto. “But hindsight is 20/20.”
Lower crude prices are eroding the ability of state-owned Petroliam Nasional Bhd, known as Petronas, to pay dividends to the government, chief executive officer Tan Sri Shamsul Azhar Abbas said on November 28.
Assuming an unchanged Petronas dividend, the fiscal deficit will exceed the government’s target of 3 percent of gross domestic product if Brent crude oil averages less than US$60 a barrel in 2015, according to Philip McNicholas, a senior economist at BNP Paribas SA in Singapore. Brent has averaged about US$50 so far this year.
“Short term, growth will be under pressure,” said McNicholas, a former lead sovereign rating analyst on Malaysia at Fitch Ratings Ltd.
“The government’s going to struggle to provide the kind of fiscal support they may have wanted to. In the meantime you still have the problem of excessively leveraged households.”
Malaysia’s household debt was 86.8 percent of GDP as of end-2013, according to central bank data. It grew by 12.7 per cent annually from 2003 to 2013, a report by the bank showed.
“Malaysia is Asia’s undisputed loser from the collapse in oil prices,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London.
“The sharp fall in prices is exposing balance sheet vulnerabilities in the context of what has been a dramatic increase in public and household indebtedness over the last several years.
“The government needs to take bolder measures to rein in public spending and improve the transparency and credibility of fiscal policy.”
Removing fuel subsidies will save the government about RM12 billion ringgit (US$3.4 billion), said YeeFarn Phua, Singapore-based Associate Director, Sovereign & International Public Finance Ratings at Standard & Poor’s.
“I still believe that the Najib administration is very serious about fiscal consolidation.”
The economic risks and the prospect of lower revenue from energy exports has put pressure on the currency.
The ringgit has fallen more than 11 per cent against the dollar since the start of September, while five-year credit-protection costs touched a 16-month high on Jan 13, according to CMA New York data.
The economic outlook and slower credit growth also contributed to the collapse of a proposed three-way merger to create the nation’s biggest bank, according to Fitch Ratings.
Working in Najib’s favor are rising palm oil prices, which have rebounded 24 percent since hitting a five year-low in September on the Bursa Malaysia Derivatives. Exports of the commodity earned Malaysia RM3.4 billion in November, compared with RM2.8 billion for crude oil, according to data compiled by Bloomberg.
Still, it’s the focus on crude that’s driving a lot of market pricing, said Wiranto at OCBC.
“The main big gorilla factor has been oil,” he said in a phone interview. Analysts search for “net oil exporter in Asia, and then Malaysia pops up. That has colored a lot of sentiment.” — Bloomberg