SINGAPORE: As crude oil prices continue to fall in the global markets there is mounting concern that low oil prices could put a spanner in the works of Malaysia’s already fragile growth story, its budget deficit and its currency, the ringgit.

Oil industry analysts now expect the benchmark West Texas Intermediate could test and break below US$60 (RM206) per barrel level before Christmas, and Brent crude could be hovering between US$60 and US$65 a barrel within next few weeks. 

As the only net exporter of oil and gas in Asia, Malaysia appears most vulnerable say economists who have spoken to The Edge Singapore in recent days. “Whichever way you look at it, low oil prices are a huge bonanza for all of Asia, except Malaysia,” said Jehangir Aziz, chief emerging-Asia economist for JP Morgan in Singapore. 

To be sure, falling oil prices hit Malaysia in several ways. “But you need to separate Malaysia’s deteriorating trade balance situation from its fiscal issues,” Euben Paracuelles, Southeast Asian economist for Nomura Holdings Inc in Singapore told The Edge Singapore. 

Paracuelles noted that 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, says the Nomura economist. 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,” he argues. A further fall in oil prices could take trade balance down even lower.

Petroliam Nasional Bhd (Petronas) group chief executive officer (CEO) Tan Sri Shamsul Azhar Abbas said over the weekend that if oil prices hover around US$75 per barrel, payments to the Malaysian government could be 37% lower next year at RM43 billion, with dividends of around RM17 billion, taxes of RM 17 billion and royalties at RM 9 billion. That is about RM25 billion (or 2.3% of GDP) lower than the projected payment this year of RM68 billion, with RM29 billion in dividends, RM26 billion taxes and at RM13 billion in royalties, said Chua Hak Bin, Southeast Asia economist for Bank of America Merrill Lynch in Singapore.

Chua noted that Petronas’ guidance for a RM25 billion fall in contributions to government coffers is larger than the total fiscal savings from the recent scrapping of fuel subsidies, which Chua estimates at about RM18 billion (or 1.7% of GDP).

Petronas’ revenues were down 1.3% year-on-year to RM 80.4 billion in the third quarter ended Sept 30, while state oil giants net profits fell 12.3% to RM15 billion. Pertains management expects current fourth quarter earnings to be “considerably lower” due to a further decline in oil prices. Bank of America Merrill estimates that every US dollar change in oil price has a RM1 billon impact on pre-tax profit.

Chua argued that with oil prices in a free fall, the Malaysian government 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,” he wrote in a note on Dec 1.

“Savings from the recent scrapping of subsidies will be around 1.4% of the GDP,” said Paracuelles.

For his part, Chua said the government will miss its fiscal deficit target next year despite the scrapping of fuel subsidies that became effective yesterday. Oil-related revenue contributes close to 30% of annual government revenues.

Bank of America’s earlier calculations projected 0.5% of GDP hit to government revenues from a 10% fall in global oil prices. Global oil prices are currently 30% lower than US$100 a barrel assumed in the budget presented just six weeks ago. Analysts are forecasting that prices for benchmark Brent crude could drop below US$60 per barrel over the next few months. That implies a 2% of the GDP hit to the government revenues. 

Lower oil prices are also likely to hurt investments as Petronas and other oil and gas companies rein in spendings while their profits are in a free fall. Bank of America Merrill Lynch is forecasting GDP growth to slow to 5% next year from 5.8% this year, in part due to slower investment growth as well as the implementation of 6% goods and services tax (GST) next April.

Petronas group CEO has said the state oil giant could cut capital expenditure (capex) by 15% to 20% next year. Petronas will not dish out new risk sharing contracts (RSC) unless oil prices climb above US$80 per barrel, he indicated recently. For projects that had not been awarded final investment decisions (FID) could also be impacted as it reins in investments. Total capex of Petronas group amounted to RM56.6 billion in 2013, of which RM19 billion was invested into exploration and production activities in Malaysia, to enhance local production as well as to develop new fields.

Falling oil prices could also hurt the ringgit.

Nomura’s Paracuelles said he has had a very cautious view of the Malaysian currency in recent months. “As a lot of foreign investors have exposure to the ringgit, and overseas investors make more than 50% of the total bond holders, I believe Malaysian policymakers will tread very carefully,” he said. “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.”

Assif Shameen is contributing editor at The Edge Singapore

This article first appeared in The Edge Financial Daily, on December 2, 2014.