The plunge in global oil prices will lead to much lower Petronas – and consequently, government – revenue and worsen the government’s fiscal deficit.
Some key points extracted from this report in the Edge:
– low oil prices are a huge bonanza for all of Asia, except Malaysia
– while Malaysia is now technically a net importer of refined oil products, if crude oil and gas are included, Malaysia remains a net exporter, indeed the only one in Asia.
– Every US$10 drop in global oil prices translates into 0.2% decline in Malaysia’s trade balance…. Since oil prices are down over US$35 from their US$105 peak earlier this year, that’s 0.8% of the gross domestic product (GDP) decline in trade balance just on crude oil. “If you add in gas, petroleum products, and all other things you are probably looking at 1.2% or so GDP decline in trade balance…”
– if oil prices hover around US$75 per barrel, Petronas payments to the Malaysian government could be 37% lower next year at RM43 billion…. about RM25 billion (or 2.3% of GDP) lower than the projected payment this year of RM68 billion…
– a RM25 billion fall in Petronas contributions to government coffers is larger than the total fiscal savings from the recent scrapping of fuel subsidies, which (is estimated at) at about RM18 billion (or 1.7% of GDP).
– Malaysia is now likely to miss its original 3% fiscal deficit target for next year… “We now expect fiscal deficit to come in at about 3.8% of GDP in 2015, widening from 3.5% of GDP this year” …
– Oil-related revenue contributes close to 30% of annual government revenues….
– Falling oil prices could also hurt the ringgit.
– “In an environment where the US Federal Reserve (Fed) is looking to normalise interest rates and the US dollar is strengthening, things could be bad for flows that are interest-rate sensitive,” the Nomura economist said. “Falling oil prices mean Malaysia’s current account surplus narrows further, and therefore there is a smaller buffer to counter capital outflows particularly if the Fed moves earlier than anticipated.”
– Weaker yen and quantitative easing in Japan are also playing major roles in Malaysia because Japan is a big importer of Malaysian commodities as well as other goods. Weaker yen makes it more expensive for Japan to buy those goods so there would be more pressure on the ringgit,” he argued.
– Nomura is keeping GDP growth target around 5% for 2015 though Paracuelles said the risks are to the downside. “There is also the issue of slowdown in China, and a generally weaker global economy, and as a fairly open, export-oriented economy Malaysia is more vulnerable than many of its counterparts.”
Strange, isn’t it? Price goes up, we lose. Price goes down, government (i.e. public) loses. Heads they win, tails we lose.
Thanks to blog visitor Simon for the link.