This article first appeared in Corporate, The Edge Malaysia Weekly, on May 23 - 29, 2016.

PETROLIAM Nasional Bhd’s (Petronas) recent results announcement is an urgent reminder that the recent rebound in crude oil prices does not mean that the worse is over for Malaysia’s economy, which is trying to wean itself off a heavy dependence on oil-related revenues.

Recall that oil and gas saw a ghastly start to the year. Crude oil prices ended last year at about US$41 per barrel and quickly tumbled to below the US$30 per barrel level in mid-January, a level not seen in 12 years.

It sent shockwaves around the globe. Everyone in oil and gas reeled while oil-dependent countries scrambled to deal with reduced revenues.

Malaysia was not spared and in late January, the government was forced to revise Budget 2016 given the RM7 billion to RM9 billion loss in revenue.

This was because the original Budget 2016 tabled last October was based on oil prices being at an average of US$48 a barrel, whereas the revision put average Dated Brent crude oil prices at US$30 to US$35 per barrel.

But in the past week, things have started looking a little peachy again. The World Bank recently raised its 2016 forecast for crude oil prices to US$41 per barrel from US$37 previously.

Market data shows that Brent crude futures for July 2016 are trending higher, hitting a year-to-date high of US$49.28 per barrel on May 17.

But for those who are heaving a sigh of relief for Malaysia’s economy, Petronas’ recently released first-quarter results ended March 31, 2016 (1Q2016), are a reality check.

The title of the press release says it all — “Petronas endures tough start to 2016”.

In 1Q2016, Petronas’ revenue fell 25.8% year on year to RM49.1 billion while profit after tax fell 59.6% to RM4.6 billion.

The company attributed the lower revenue to lower product prices following the prolonged downward trend of benchmark Dated Brent and Japan Customs Cleared prices, coupled with the lower sales volumes of crude oil and condensates, processed gas and petroleum products.

During the quarter, Petronas said average Dated Brent prices of US$33.89 per barrel was some 37% lower than the same period last year when average prices were US$53.97.

Additionally, the ringgit had weakened against the greenback during its 1Q2016 at 4.20, 16% higher than 3.62 a year ago.

All in all, Petronas continues to warn that the future does not look great.

“Petronas expects performance to be affected by the volatility of oil prices and foreign exchange rate,” the unlisted national oil firm said in its press release accompanying its financials.

Its financial results are closely watched as they provide an indication of how much is going into government coffers via Petronas’ annual dividend payments and export duties.

The company’s recent financial results put forward two timely and important reminders for Malaysia today. First, oil money is no longer a sustainable source of income, economists say. Secondly, and perhaps more importantly, the government must commit to fiscal discipline.

Already, in the revised budget, Prime Minister Datuk Seri Najib Razak said the government is committed to achieve a fiscal deficit target of 3.1% to gross domestic product and to reduce national debt levels to below 55%. There is little indication of when those numbers can be achieved.

Given the outlook for oil prices going forward, MIDF Amanah Investment Bank Bhd chief economist Kamaruddin Mohd Nor says the government indeed has to move away from deriving a significant part of its revenue from oil.

“The government has broadened its revenue base by introducing the GST (Goods and Services Tax), which brought in some RM27 billion last year. There has been some fiscal consolidation and prudent spending.

“It is definitely good for Malaysia to be less dependent on oil and to go into renewable energy and higher value-add activities,” says Kamaruddin.

This is especially urgent in today’s economic climate, given the lingering uncertainties in the global economy, soft sentiment on the domestic front and depressed oil prices.

Many economists and oil and gas analysts do not believe that the current upward trend in crude oil prices is sustainable, nor is it cause for good cheer. They also point out that Petronas’ crude oil price outlook at US$30 per barrel for 2016 and US$40 per barrel for 2017 is prudent.

In a recent oil and gas report, AmInvestment Bank says the current price trajectory may not be sustainable given the recent weekly rise in US inventories by 1.3 million barrels.

AmInvestment Bank says prospects for crude oil prices to sustainably turn around “are opaque at this stage”. This is due to the re-entry of Iranian oil into global markets and the potential resurgence of shale oil output if crude prices sit at the US$40 per barrel threshold for a sustained period.

An oil and gas sector analyst opines that it is still too early to say if the worst is over for Petronas this year. “Revenue is a function of volume times price, so if the prices are low, then there is a tendency to increase volumes. So, on the bright side, increasing volumes is good.

“If the production rate is sustained and if crude oil prices continue to improve, then, technically, revenue should improve. But it doesn’t mean bottom line will improve,” he says.

Looking at government revenue estimates over the last 10 years, the contribution of oil-related revenues relative to total revenue has been coming down, particularly in the last two years.

Oil-related revenues include revenue from petroleum income tax of companies; export duties, of which petroleum is the highest contributor; income from the Malaysia-Thailand Joint Authority; and Petronas dividends.

In the past, oil and gas were significant contributors to the federal government’s revenues, accounting for over 30% of earnings. It has dipped to below 30% of total revenue since last year. Revenue estimates for this year puts oil and gas revenue at 14% of total government revenue (see chart).

Significantly, Petronas’ dividend payment to the government at RM16 billion this year is much lower than the RM26 billion it committed to in 2015 and the RM29 billion it paid in 2014.

The Performance Management and Delivery Unit (Pemandu) claims that greater diversification in National Key Economic Areas has “tremendously decreased” the government’s dependence on oil revenue.

“Had we not carried out the ETP (Economic Transformation Programme) to further develop and attract investments into the economic sectors in which Malaysia had competitive strengths, this would be an alarming situation,” says Pemandu in its National Transformation Programme annual report 2015.

An economic researcher, however, points out that this move to reduce reliance on oil is but a knee-jerk reaction to significantly lower crude oil prices. 

“Most people know that the days of US$100 a barrel are over. It was a long time coming. Malaysia could have prepared itself earlier but it didn’t. Let’s just hope that Malaysia does not go back to this ‘addiction’ to oil.”

The researcher says the squeeze from lower oil revenue is making it more urgent than ever for the government to show real commitment to fiscal discipline and new areas of economic growth for the country.

“We cannot rely on what we used to rely on — easy petroleum money and low-cost manufacturing. This is not what’s going to move us into the future,” he says. 

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