Oil shock sends Malaysian economy skidding

In the 1990s, then Prime Minister Mahathir Mohamad crowned his modernisation of Malaysia with a new administrative city of Putrajaya and the world's tallest twin towers built using cash from the national oil company Petronas.

And until 2014, about a third of government revenues came from Petroliam Nasional (Petronas) - the sole Malaysian entry in the Fortune 500 list of the largest companies in the world.

Petronas, with operations in 50 countries, reported turnover of RM188 billion (S$61.1 billion) for the first nine months of last year, and net profit of RM23.8 billion.

But the seemingly bottomless dive in oil prices over the past 18 months has ended the days of Malaysia living like a trust-fund kid. A dim global economic outlook has also depressed another major Malaysian commodity export, palm oil, as its price follows global oil gyrations.

Malaysia will announce a Budget revision on Jan 28 to take into account lower oil prices, as the current Budget is based on average oil prices of US$48 a barrel. The government said each US$1 drop in oil prices slashes RM300 million from its annual revenue.

Some leading banks, such as Goldman Sachs, are looking at US$20 a barrel as a possibility. Brent crude for March delivery traded in Europe ended the week at US$28.94 a barrel.

Prime Minister Najib Razak, who is also Finance Minister, has touted the 6 per cent goods and services tax (GST) as Malaysia's "saviour".

But while last year's introduction of GST will provide a much-needed RM40 billion to make up for lost oil revenue, it will rip out a huge chunk from private consumption.

Impact of the falling ringgit on Singapore

  • The Malaysian Ringgit (MYR) slumped to an all time low at RM3.12 to the Singapore dollar (SGD) on Nov 28.
  • This sounds like an excellent chance to head to Johor Bahru (JB) and make all the purchases while it lasts. The already cheap food and groceries just got cheaper and fuel is about a third of Singapore's price.
  • But while we might be rejoicing now that the MYR has spiraled downwards, but in the mid to longer term, the ones that would be suffering the most may be Singaporeans.
  • Many often forget that Malaysia is the third largest economy in South East Asia, and within the top three largest export destinations for Singapore's goods and services.
  • If Singapore's currency becomes too strong, there will be a reduction in Malaysian demand for Singapore's exports which will ultimately reduce Singapore's earning power.
  • The short term benefits may be apparent but in the long term, any weaknesses in the economies of our major trading partners will not be good news for Singapore.
  • But there are ways to take advantage of the weaker ringgit. As individuals, we can head to the moneychangers and buy up some MYR.
  • Singaporeans should definitely consider visiting JB for their delicious food and other goods. There are also many things that are simply cheaper in Malaysia.
  • A combo adult ticket, which allows you entry to the theme park and the water park, costs RM175 while the child and senior option costs RM140.
  • An entry ticket to the park featuring the world famous cat (which caused confusion earlier this year before creator Sanrio confirmed it really is a cat) costs RM75 for both adults and children.
  • The rib-smacking restaurant opened an outlet at the Komtar JBCC, a stone's throw from the Woodlands Checkpoint. They currently have a promotion called the Tony's Fiesta Platter, which costs RM148.
  • In light of the recent painful developments - it still hurts thinking of the Lions' exit from #AFFSuzukiCup - here's how much you will fork out for the Malaysian national team jersey.
  • If you have a couple of hours to while away, laser tag is a fun option for the young and young-at-heart.
  • Singaporeans can also consider investing in Malaysia. If we were to invest in the KLCI Index at Dec 31, 2006, we would have made a handsome return on about 48.6 per cent.

"These are some of the key reasons why we see growth slowing to 4 per cent this year from around 5 per cent last year," Nomura's South-east Asia economist Euben Paracuelles told The Straits Times.

Nomura expects just 13 per cent of the government's fiscal revenue to be oil-related this year, based on an assumption of prices averaging US$30 to US$35 per barrel.

With the same oil price forecast, Affin Hwang Investment believes that without any sharp cuts or other fiscal measures, the fiscal deficit will hit 3.5 per cent of gross domestic product this year. This would surpass the target of 3.1 per cent set by Mr Najib to rein in public debt.

Government officials are fretting that the looming cuts in expenditure could badly affect services such as healthcare and security. Security officials are especially worried as this is a time of heightened alert over terrorism.

"We will usually adjust our business-as-usual Budget to cover such events (of emergency), but it seems that would be cut, too," Deputy Home Minister Nur Jazlan Mohamed was quoted as saying by the New Straits Times last week.

Tan Sri Ramon Navaratnam, chairman of the Centre for Public Policy Studies, sees many ways to trim government spending.

Cut out the "unnecessary travelling, study tours and foreign travel; wasteful and elaborate opening and closing ceremonies; special uniforms for all kinds of occasions; and big lunches and dinners", he said.

Inflation is likely to soar this year against last year's expected 2.2 per cent, according to Malaysia's biggest lender Maybank.

"Inflation will pick up to 3 to 3.5 per cent despite the tapering GST effect as inflationary pressures will be sustained by further adjustments in subsidies and controlled prices, impact of weak ringgit on imported costs, and the 11 to 15 per cent increase in minimum wages effective July 1," it wrote in a 2016 outlook report.

The message then is clear for Malaysians: Just three weeks old, this is the year to hunker down as the country is being forcibly weaned off its oil riches.


This article was first published on January 18, 2016.
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