KUALA LUMPUR (March 9): The new Malaysian government will have to come to terms with the reality of low crude oil prices and may revise Budget 2020, as crude oil prices are currently trading 45% lower than the benchmark set for Budget 2020.
In a note today, MIDF Amanah Investment Bank Bhd Research said it is expecting Malaysia’s gross domestic product (GDP) growth to be “under pressure” in 2020 at this juncture, following this year’s continuous slump in crude oil prices, which escalated on Monday.
“Plunge in global oil price will suppress Malaysia’s fiscal capacity given that previous Budget 2020 is based on the assumption of US$62/bbl,” said the research house.
“The newly formed government will likely revise the Budget 2020 and we may see a reduction in government expenditure and investment,” it added.
Brent crude oil prices fell to US$31/bbl on Monday — its lowest since 2016 — after Saudi Arabia reportedly planned to oust competitors by increasing production by another 2 million barrels per day and to give discounts to major clients as retaliation after OPEC+ talks last week failed to reach a consensus to lift prices.
This follows Russia’s statement that oil prices at US$45/bbl is still sufficient for the country to maintain its economy.
It has been reported previously that every US dollar drop in crude oil prices would impact the nation’s coffers by up to RM300 million for the year.
Lower oil and gas prices resulted in slower mining and quarrying sector contribution last year, which partly contributed to Malaysia’s GDP growth slowing year-on-year to 4.3% in 4Q19 from 4.7% in the year-ago corresponding period.
This year alone, Brent crude oil prices have fallen by nearly 50%, following the Covid-19 outbreak that started in the year to add to existing demand concerns amid changing trend towards electrification and rising awareness of carbon emission.
Low retail fuel prices
On the positive side, MIDF Research said retail fuel prices especially RON95 may touch RM1.32 per litre if average Brent oil price stays at US$35/bbl.
“Hence, inflationary pressure to stay low and support domestic consumption,” it said.
The benchmark crude price averaged US$57.63/bbl for the first two months of 2019.
According to reports, there is a slim expectation that the shock decision by Saudi Arabia will be short-lived, as the oil producer has the opportunity to renegotiate before the previous OPEC production cut pledge ends by the end of March.
Should further talks fail to result in Saudi Arabia scaling back its retaliatory actions, pundits are of the view that prices might touch or fall under the 2016-low of US$26/bbl.