Meet Asia’s ‘undisputed loser’ from oil, where fiscal cuts loom

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SINGAPORE/KUALA LUMPUR (Jan 16): The plunge in oil prices that spurred a currency crisis in Russia and endangered Venezuela’s leadership is also roiling markets in Malaysia, a net oil exporter in Southeast Asia. Economists say it’s not time to panic, yet.

For one thing, Malaysia’s oil and gas products account for about 22 percent of its exports, compared with more than 70 percent for Russia’s energy. For another, Prime Minister Najib Razak is buying some fiscal breathing room by abolishing decades-old energy subsidies and introducing a 6 percent goods and services tax in April, according to Nomura Holdings Inc.

That would allow Najib to keep close to his budget goals even as declining investor confidence pushed the currency this week to its lowest level since April 2009 and boosted the cost of insuring the nation’s debt.

“Unless oil prices fall significantly further from here, our view is the pressures can be manageable,” said Euben Paracuelles, a Singapore-based economist at Nomura. “Thanks to the few steps that they’ve already taken in the last two or three years, I think they should be able to respond effectively.”

Najib will hold a special session to talk about economic developments and the country’s financial position on Jan. 20, the finance ministry said. With crude prices at half the level of a year ago, the pressure will be on him to accelerate the restructuring of an economy grappling with a cash squeeze and elevated household debt and further reduce the nation’s dependence on oil.

Oil Pressure

“The oil-price slump does underline the importance of pressing on and perhaps hastening some of the fiscal reforms,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “Najib has some room to breathe, but he will do well to announce forward plans.”

While Najib has cut the budget deficit as a percentage of gross domestic product every year since he came to power in 2009 and reduced the government’s dependence on hydrocarbons, oil and gas still make up about 30 percent of state income, according to Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp.

“Arguably, they should have done more in terms of reducing the dependence on oil even more or introducing the GST even earlier,” said Wiranto. “But hindsight is 20/20.”

Lower crude prices are eroding the ability of state-owned Petroliam Nasional Bhd., known as Petronas, to pay dividends to the government, Chief Executive Officer Shamsul Azhar Abbas said on Nov. 28.

Brent Price

Assuming an unchanged Petronas dividend, the fiscal deficit will exceed the government’s target of 3 percent of gross domestic product if Brent crude oil averages less than $60 a barrel in 2015, according to Philip McNicholas, a senior economist at BNP Paribas SA in Singapore. Brent has averaged about $50 so far this year.

“Short term, growth will be under pressure,” said McNicholas, a former lead sovereign rating analyst on Malaysia at Fitch Ratings Ltd. “The government’s going to struggle to provide the kind of fiscal support they may have wanted to. In the meantime you still have the problem of excessively leveraged households.”

Malaysia’s household debt was 86.8 percent of GDP as of end-2013, according to central bank data. It grew by 12.7 percent annually from 2003 to 2013, a report by the bank showed.

‘Undisputed Loser’

“Malaysia is Asia’s undisputed loser from the collapse in oil prices,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London. “The sharp fall in prices is exposing balance sheet vulnerabilities in the context of what has been a dramatic increase in public and household indebtedness over the last several years. The government needs to take bolder measures to rein in public spending and improve the transparency and credibility of fiscal policy.”

Removing fuel subsidies will save the government about 12 billion ringgit ($3.4 billion), said YeeFarn Phua, Singapore- based Associate Director, Sovereign & International Public Finance Ratings at Standard & Poor’s. “I still believe that the Najib administration is very serious about fiscal consolidation.”

The economic risks and the prospect of lower revenue from energy exports has put pressure on the currency. The ringgit has fallen more than 11 percent against the dollar since the start of September, while five-year credit-protection costs touched a 16-month high on Jan. 13, according to CMA New York data.

Megabank Merger

The economic outlook and slower credit growth also contributed to the collapse of a proposed three-way merger to create the nation’s biggest bank, according to Fitch Ratings.

CIMB Group Holdings Bhd., RHB Capital Bhd. and Malaysia Building Society Bhd. said on Jan. 14 they would scrap their proposed merger, citing economic conditions. The combination would have been the biggest Asian merger transaction announced in the fourth quarter, data compiled by Bloomberg show.

The nation’s banks are charging one another the most to borrow in six years as the oil-price slump, a falling ringgit and default concerns dent confidence. The three-month Kuala Lumpur interbank offered rate, a gauge of funding availability, rose to 3.87 percent in December, 62 basis points more than Bank Negara Malaysia’s benchmark rate and the biggest gap since January 2009, data compiled by Bloomberg show.

State Fund

1Malaysia Development Bhd., a state investment company, missed two repayment deadlines for a 2 billion ringgit loan and has been given a grace period until the end of January, The Edge newspaper reported on Jan. 6, citing unidentified people. 1MDB said on Jan. 13 it redeemed its $2.32 billion investment in a Cayman Island fund following criticism from opposition lawmakers the money wasn’t managed transparently.

Government finances were also hit by the country’s worst floods in decades in December that forced the evacuation of more than 200,000 people from their homes and left at least 10 people dead. The damage from the disaster may cost billions of ringgit, Deputy Prime Minister Muhyiddin Yassin said this month, according to the Malaysian Insider.

Working in Najib’s favor are rising palm oil prices, which have rebounded 24 percent since hitting a 5 year-low in September on the Bursa Malaysia Derivatives. Exports of the commodity earned Malaysia 3.4 billion ringgit in November, compared with 2.8 billion ringgit for crude oil, according to data compiled by Bloomberg.

Still, it’s the focus on crude that’s driving a lot of market pricing, said Wiranto at OCBC.

“The main big gorilla factor has been oil,” he said in a phone interview. Analysts search for “net oil exporter in Asia, and then Malaysia pops up. That has colored a lot of sentiment.”