By Chan Quan Min
Predictions for the Malaysian economy in a cheap oil environment range from the alarmist to the reassuring. It is however difficult to say which way the economy will go this year given so much uncertainty of late. In the meantime, earning dollars is the way to go.
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Most of the worry over economic performance this year stems from cheap oil. As a major oil & gas producer and a net exporter, changes in the price of crude oil can sway the country’s trade balance and affect government revenue.
“Malaysia is the most vulnerable country in this region (due) to lower oil prices,” Hong Kong-based head of Asia Pacific financial markets at Rabobank, Michael Every, told Bloomberg last week.
Every also told the news service that there could exist a “worrying combination” of higher government spending together with lower revenue and slower growth.
In recent months, countries overly reliant on oil exports such as Russia, Iran and Venezuela have seen worsening economic conditions on lower government revenue and capital flight.
Funds are quickly exiting countries thought to be impacted by cheap oil. Malaysia is one of those countries, reporting US$2 billion in outflows of foreign funds in 2014, but is not as hard hit as some others.
The change to a net outflow of foreign funds is a shift from past years when foreign fund inflows were recorded at an average of US$2.7 billion per year from 2010 to 2013.
Malaysia has been spared the worst because revenue from taxes on petroleum production and Petronas dividends account for only about a third of government revenue, a share that has fallen gradually over the past decade.
In contrast, Russia, which has an economy now in tatters, has an oil & gas industry that contributes about 75% of government revenue.
Still, the funds outflow is serious enough that the Ministry of Finance has called on all government-linked companies to temporarily halt purchases of foreign assets in order not to exacerbate the outflow of funds.
Balancing act
But while it is a net oil exporter by value – Malaysia exports high quality crude while domestic consumption uses cheaper imported crude – the net oil trade surplus has “shrunk significantly from 1.8% of gross domestic product in 2010 to a mere 0.2% in 2013,” a CIMB Research report noted. This suggests a muted impact from cheap oil.
The report dated late last year found that Malaysia could be a “likely beneficiary of lower oil prices” instead of a loser because “its oil imports bill would be reduced, resulting in lower cost of doing business and higher production amid the positive demand effect.”
This still leaves concerns over how cheap oil will reduce government revenue and jeopardise plans to further trim the budget deficit this year. CIMB thinks these concerns might be exaggerated.
“We think the (Petronas) dividend portion is likely to be quite stable. Although Petronas requested to cap the dividends paid to government at 30% of net profit last year, the amount paid out last year was still a hefty 41% of net profit.”
“Also, a more diversified government revenue base with the coming Goods and Services Tax (GST) in April 2015 allows lower exposure to oil revenues,” CIMB analysts wrote. “Meanwhile, the lower oil subsidy bill puts less pressure on the fiscal deficit.”
They added that second-round effects could be a positive for Malaysia such as when cheap oil stimulates growth in advanced economies, which filters down to increased consumption of Asian exports.
Meanwhile, reassuring voices in the oil price rout typically come from government officials.
Chua Tee Yong
Deputy Finance Minister Chua Tee Yong last week calmed worried Malaysians by reminding them that the weak ringgit is a boon for the tourism sector and exporters. He also said that the weak ringgit would also enhance the country’s international competitiveness.
Minister in the Prime Minister’s Department and Pemandu CEO Idris Jala in a radio show last month brushed off concerns that cheap oil will lead to reduced government revenue.
He was taking a question from a listener and answered with a calculation that assumes that savings from the removal of fuel subsidies would more than offset any decline in Petronas revenues.
“Using Budget 2015 figures, let’s do some maths. RM27 billion (oil and gas dividend) minus RM11 billion (RON95 and diesel subsidies) would result in a net surplus of RM16 billion.
“Under a lower oil price scenario, assuming dividend drops, say to RM20 billion (amount paid by Petronas previously when oil price was lower), the government still registers a net surplus of RM20 billion because we no longer have to foot fuel subsidy bills,” said Jala.
“So, my point is that it is not just doom and gloom. There may be a silver lining for the other sectors in the economy.”
Boom in demand for rubber
The silver lining can certainly be seen in the rubber products industry, one that exports almost its entire production and is thus able to benefit from being paid in foreign currency worth an increasing amount of ringgit.
As a general rule, export industries stand to gain when the ringgit is weak but lose out when the ringgit is strong. Malaysia’s main exports are electronics, petrochemicals, oleo chemicals, edible oils and rubber products.
But the worldwide commodities rout has hurt crude oil and crude palm oil prices, leaving little to gain from a cheap ringgit. Plantation companies earnings and stock market valuations are currently at a low as a glut in edible oils continues to depress crude palm oil prices.
Prices of natural and synthetic rubber gloves, the main forms of rubber products Malaysia exports, have however remained stable.
Exports of rubber products last year topped RM15 billion and demand does not seem to be letting up. Rubber glove manufacturers are responding to demand by adding a huge amount of production capacity in new plants around the country.
“Orders are still strong at our side and we are rushing to build new capacity,” said Edward Yip of group corporate affairs at Kossan Rubber, one of the big four glove manufacturers in the world.
In a recent report titled ‘Resilient Rubber, ‘ RHB Research found that just a 3% increase in the US dollar to ringgit exchange rate could lift industry earnings by 2% to 4%. Since July last year, the US dollar has risen almost 9% against the ringgit.
RHB has a ‘buy’ call on the big four rubber glove manufacturers Kossan, Hartalega, Supermax and Top Glove as well as on of the world’s largest condom manufacturers, Karex.
Yesterday: Cheap oil: Planes, lorries and cars go further
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