This article first appeared in The Edge Malaysia Weekly, on November 23 - 29, 2015.

Malaysia is blessed with rich biodiversity and natural resources — from minerals such as tin to crude oil and liquefied natural gas (LNG) reserves. The country’s oil and gas riches have fuelled the growth of national oil corporation Petroliam Nasional Bhd (Petronas), which last year was ranked 68th on the Fortune 500 list of the world’s largest companies.

From its inception in 1974 to end-2014, Petronas had contributed RM881.3 billion in dividends, taxes, royalties and duties to federal and state coffers, company data shows. If one were to include the RM230.6 billion in foregone revenue (gas subsidy) since regulated gas prices came into effect in May 1997, Petronas’ monetary contribution to Malaysia’s economy would amount to a whopping RM1.11 trillion over the past four decades.

To put that into perspective, RM1.11 trillion would be enough to pay off Malaysia’s government debt of RM623 billion, cover the RM175.8 billion debt guaranteed by the government as at end-September 2015 and comfortably fund Budget 2016, with RM40 billion extra to double cash transfers and allocation for education, health and housing.

It is also 1.7 times the total investment assets of the Employees Provident Fund (EPF) of RM667.21 billion as at end-June 2015 and 2.7 times Bank Negara Malaysia’s foreign reserves of US$93.9 billion (RM417.2 billion) as at mid-November 2015.

Petronas’ cumulative RM1.11 trillion contribution to date would also have been enough to fund Budget 2013 to Budget 2016, with change to spare. Prior to Budget 2009, national budgets were below RM200 billion a year, but they grew even as government revenue expanded. The country’s budget deficit has averaged RM40 billion a year for the past five annual budgets.

If just 10% of that amount has been set aside for a natural resource fund, Malaysia would now have RM111.2 billion, even without counting the effect of compounding interest and investment gains.

Is it too late to start saving the country’s oil wealth now that oil prices are projected to stay low for some time?

To be fair, it is natural to use funds from natural resources to fund investments in the oil and gas sector as well as to develop the country in the initial years. Even Norway, a country acknowledged as a global leader in managing wealth from natural resources, took 20 years before an oil wealth fund was established for the benefit of future generations. It took 26 years from the time the country struck oil before the first capital infusion was made into the Government Petroleum Fund, now known as the Government Pension Fund Global (see accompanying story).

With US$844 billion in the kitty from contributions as well as returns on its global investments, the Norwegian government has a large cash hoard to take the country through the tougher times ahead. Brent crude oil has been see-sawing in the US$40 to US$55 range over the past four months, and was trading at US$44 a barrel at the time of writing.

Brent was priced above US$100 a barrel for most of 2014 before September,  which was why Malaysia was forced to revise Budget 2015 in January this year. Budget 2016 assumed crude oil prices to be at US$48 a barrel, a level most economists saw as prudent.

Petronas also announced that its dividend payment to the government next year will be reduced to RM16 billion — its lowest since 2007 — from RM27 billion to RM30 billion a year from 2009 to 2015, to free up cash to invest in future growth.

“Sustaining a RM16 billion dividend is probably a more realistic target but will probably require oil prices remaining stable and possibly some deferment of investment projects. Petronas had guided capex plans worth RM350 billion over the next five years, which may be a strain on its cash flow,” says Chua Hak Bin, head of Asean economics at Bank of America Merrill Lynch. “Petronas’ strong investment rating is conditional on its low leverage and high cash reserves.”

The lower dividend from Petronas also shrinks the government’s revenue next year — a shortfall that the government said could be managed with the additional revenue from the implementation of the Goods and Services Tax (GST) since April.

Yet at the same time, the tougher times ahead and the Norway experience show the benefit of having sizeable savings to smooth out short-term market volatility and stimulate the economy during periods of slower growth.

Like Norway, Malaysia too meant to save the wealth from oil and other natural resources for future generations. In 1988, the National Trust Fund (NTF), or Kumpulan Wang Amanah Negara (KWAN), was established as the country’s natural resource fund, managed by Bank Negara Malaysia.

Unlike Norway, information on KWAN is not readily available. Petronas’ 2014 annual report shows that it had contributed RM10 billion to KWAN, increasing its contribution to RM2 billion a year in the past three years.

Sadly, Petronas remains the sole contributor. The RM10 billion in oil wealth saved is a mere 1.1% of the RM881.3 billion it has contributed to the federal and state governments since 1974.

Given that the government is already constrained by the need to lower its budget deficit from 3.2% this year to 0.6% by 2020, economists reckon it will take time and “a lot of political will” to put money into a natural resource fund that not only has to be transparently managed but also one the government cannot easily tap into unless approved by Parliament.

Sri Murniati of the Institute for Democracy and Economic Affairs (IDEAS) reckons that discussions on whether it is too late for Malaysia to set aside the country’s oil and natural resource wealth for future generations “is the kind of conversation that we [Malaysia] should have, along with reducing the fiscal deficit”.

“What if by 2025, instead of a deficit, Malaysia, as a result of committing to its fiscal rule, has a budget surplus? What are we going to do with that surplus?” asks Sri, who is manager of the Governance and Political Economy Unit at the think tank.

In a paper titled “Investing oil and gas revenue for future generations: How to improve KWAN”, she argues for the need for money to be set aside in an improved KWAN. According to her, KWAN, with a better governance structure, “has the potential to encourage the government to be more fiscally prudent and disciplined”.

She thinks “it is not too late” for Malaysia to start saving its natural resource wealth more meaningfully and growing that for future use, be it as a stabilising fund for the national budget or an extra kitty to help fund development projects for the future generation.

Certainly, to be able to function meaningfully, the fund needs to be grown first. And before it can grow, the fund will first need to be at least on a par with the global best practices, such as Norway, in terms of structure and governance.

“If the function, role and governance of KWAN are improved, there is no need to create a new entity for the same purpose,” says Sri, referring to the need for greater transparency as well as improvements to its structure, oversight mechanism, management structure, contribution as well as withdrawal rules.

Having studied the structures of similar funds in Norway, Chile and Timor-Leste, Sri says Malaysia’s KWAN should first state clearly the objectives for saving the money in policy documents, preferably in the KWAN Act.

She also advocates an expenditure rule as well as strict withdrawal rules, whereby withdrawals “must not exceed the guaranteed return on KWAN’s investments”. Withdrawals “should be part of the budgetary process”, which means any withdrawal will need parliamentary approval.

According to her, the natural resource funds of Norway, Timor-Leste and Chile were established as savings accounts and stabilisers for the national budget. Chile’s Economic Stabilisation and Social Stabilisation Fund and Pension Reserve Fund, both established in 2006, had a combined market value of US$23.5 billion (as at August 2013), and has helped the Chilean government stabilise the national budget in a period of low copper prices.

Established in 2005, the Petroleum Fund of Timor-Leste had US$13.5 billion as at August 2013, which is sizeable compared with Malaysia’s KWAN with US$3.1 billion (RM9.413 billion) as at December 2013.

If a country like Timor-Leste, despite its high poverty rate, can have the discipline to put money aside for  a resource fund, surely it is not beyond Malaysia to do as much, if not better?

“Having rules to raise contribution to [KWAN or any other fund] can work if the government can cut expenses. Can it? It depends on how much it wants to and needs to… If you look at Malaysia’s budget expenses, you’d find that it could have spent a lot more on public housing, education and healthcare if it did not have to spend over RM20 billion on debt service charges… just like any other place, there will be wastage and maybe the bad times will force the need to cut some of that,” says a seasoned economist.

“Already, there are people looking to spend more money if oil prices go up instead of using the opportunity to have a budget surplus. Do you think the government will want to ask Petronas or Khazanah [Nasional Bhd] or other GLCs to set aside more money for the fund instead of declaring more dividends for it to spend? ”

Clearly, some of the distrust is due to Malaysia running a budget deficit since 1998, with current official projections expecting that to continue until 2020. While the government already has people looking into ways of saving money so that the fiscal deficit targets can be met, it would seem that a lot more is expected if Malaysia is to successfully build a sizeable fund to store and grow its oil money and wealth from natural resources for future generations.

That Malaysia expects to spend RM26.6 billion on debt service charges in 2016 — three times the RM9.1 billion allocated for education, health and housing — is another warning sign for the government to rethink its spending.

The good news is Petronas has been carefully managing its production of crude oil and natural gas and its investments domestically and overseas have allowed its petroleum resources to increase to 33.2 billion barrels of oil equivalents (boe). That’s roughly 55 years of production, based on its crude oil and natural gas production of 1,658 kboe per day at current technology.

But as oil and gas is a finite resource, it is bound to run out some day. The earlier Malaysia starts to prepare for that day, the better positioned it will be to face headwinds as well as to provide a wider safety net for Malaysia’s population.

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