Thursday 28 Mar 2024
By
main news image

bankofamericamerrilllynchWE cut our 2015 gross domestic product (GDP) growth forecast to 4.6% (from 5%), below the government’s 5% to 6% range, and now expect Bank Negara Malaysia to stay on hold. Concerns are mounting that the tremors from plunging oil prices may turn into a larger quake.

fiveyearstovision2020_68

Global oil prices continue to fall after Petroliam Nasional Bhd (Petronas) warned of lower payouts to the government on Nov 29. However, that warning came when oil was about US$75 a barrel. Since then, Brent oil prices have continued sliding and now trade at below US$65. The Malaysian ringgit and FBM KLCI have been on a free fall, plunging over 6% in the last two months. Bond yields have edged higher but have been largely spared, so far, from the rout.

We had raised our fiscal deficit forecast to 3.8% of GDP given Petronas’ warnings on Nov 29.

Petronas group CEO Tan Sri Datuk Shamsul Azhar Abbas estimates that if oil price hovers around US$75 per barrel, payments to the government could be 37% lower next year at RM43 billion, with dividends at RM17 billion, tax at RM17 billion and royalties at RM9 billion. This is about RM25 billion (2.3% of GDP) lower than this year’s projected payment of RM68 billion, with dividends at RM29 billion, tax at RM26 billion and royalties at RM13 billion. Petronas’ guidance for a RM25 billion fall in contributions to government coffers is larger than fiscal savings from scrapping fuel subsidies, estimated at RM15 billion (1.4% of GDP).

We project oil-related fiscal revenue falling to just RM36 billion or 3.1% of GDP in 2015, below the 5.9% for 2014 and budget forecast of 5% of GDP for 2015 (Chart 2). The government is projecting oil-related revenue at RM58 billion in 2015, 7.7% lower than the RM63 billion projected for 2014. This was based on an oil price assumption of US$105 per barrel. We estimate total oil-related revenue coming in 40% lower with oil price staying at the current levels. This would amount to a 2% of GDP hit on fiscal balance.

The risk of the fiscal deficit blowing out to over 5% of GDP cannot be dismissed, as weaker growth and corporate profits could also cut other tax revenue.

The risk of an emerging current account deficit is also a concern. The sharp fall in the trade surplus to just RM1.2 billion in October was rather surprising, given that Malaysia’s net oil trade surplus is small. The trade surplus averaged RM6.8 billion a month for the first nine months. The goods trade surplus (balance of payments basis) for 4Q2014 needs to be larger than the RM22 billion services and income deficit for the current account to remain in surplus. The services deficit has also been worsening, partly due to weak tourism receipts. We wait for clarity from November trade data, but are pencilling in a small current account deficit in 4Q2014, in a magnitude of about RM1 billion or 0.4% of GDP.

Falling liquefied natural gas (LNG) prices, which tend to follow oil prices with a lag, may also pressure the current account (Chart 4). The prices of LNG are pegged to Brent or the so-called Japan Crude Cocktail. Malaysia is a small net oil exporter, but the net gas trade surplus is huge, at RM58.9 billion (US$18 billion) or 6.2% of GDP in 2013. A 10% decline in oil prices would worsen the current account by just 0.1% of GDP, but a 10% decline in LNG prices could worsen the current account by 0.5% of GDP.

fiveyearstovision2020_68a

There are also concerns whether plunging oil prices will have a broader impact on the economy and banking system. Oil and gas sector accounts for about 10% of nominal GDP, a sizeable share, although this has fallen from 13.2% in 2005. This share may, however, understate the risks as it does not take into account oil and gas supporting services. Banking loans and liquidity could also be impacted with companies’ falling margins and tighter cash flows. The total debt of major oil and gas-related companies is more than RM21 billion, by our estimates, or about 1.6% of the banking system loans or 3.8% of corporate loans.

We cut our GDP growth estimate for 2015 to 4.6% (from 5%), down from 5.8% in 2014. Investments are likely to weaken, not just exports. Petronas said that it would cut capex by 20% next year and will not dish out new risk-sharing contracts unless oil prices climb above US$80 per barrel. Petronas group’s capex in 2013 amounted to RM56.6 billion (US$16.4 billion), of which about a third or RM19 billion (US$5.6 billion) was invested in exploration and production activities in Malaysia. The Performance Management and Delivery Unit had projected oil, gas and energy projects to generate a gross national income of RM131 billion and create 52,300 jobs by 2020.

Malaysia faces the risk of a “double miss” on both growth and fiscal deficit targets in 2015. We no longer expect Bank Negara to tighten in 2015. The implementation of Goods and Services Tax in April 2015 may compound the negative shock. Lower oil prices may also force fiscal cutbacks to contain the deficit from ballooning. Year 2015 has not even started, but is already emerging to be even more challenging than 2014.

Chua Hak Bin, Asean economist at Bank of America Merrill Lynch, warns that the country could face the risk of a ‘double miss’ on both growth and fiscal deficit targets in 2015

 

This article first appeared in The Edge Malaysia Weekly, on 22 - 28 December 2014.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share