Oil shock sends Malaysian economy skidding

A forlorn prospect from an abandoned restaurant in Kuala Lumpur of the capital's twin towers - built in the 1990s with Petronas' oil wealth. Malaysia will announce a Budget revision on Jan 28 as the government said each US$1 drop in oil prices slashe
A forlorn prospect from an abandoned restaurant in Kuala Lumpur of the capital's twin towers - built in the 1990s with Petronas' oil wealth. Malaysia will announce a Budget revision on Jan 28 as the government said each US$1 drop in oil prices slashes RM300 million from its annual revenue.PHOTO: REUTERS

GST will help boost revenue, but country has to tighten its belt

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.

"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.

A version of this article appeared in the print edition of The Straits Times on January 18, 2016, with the headline 'Oil shock sends Malaysian economy skidding'. Print Edition | Subscribe