MARKET DEVELOPMENT
Falling Commodity Prices Present Downside Risk to Malaysia’s Economy
Falling Commodity Prices Present Downside Risk to Malaysia’s Economy
Major commodities that concern Malaysia, such as crude oil and crude palm oil, are hovering at their four-year lows.
25/10/2014 (The Star) - The downside risk to economic growth seems to have increased for Malaysia in the face of falling global commodity prices.
Several economists have in recent weeks flagged their concerns over the potential negative impact the current trend, if prolonged, could have on the country, which relies on oil for revenue and a wide range of other commodities such as crude palm oil for export earnings. They note that Malaysia, as a major commodity exporter, could likely see lower export earnings under the present environment and this could add pressure on the country’s current account.
Credit Suisse Group, for one, points out that weaker commodity prices can have a direct negative impact on Malaysia’s growth through two channels.
“First, it reduces the disposable incomes of consumers, especially in the rural areas, and secondly, it lowers exports and the terms of trade, given Malaysia’s high exposure to a broad range of commodities,” the multinational financial services group explains in its recent report.
According to Credit Suisse, Malaysia looks vulnerable under the present environment of weaker commodity prices, and could potentially see its current account surplus narrow by around 0.5 to 0.8 percentage point from its estimated 4% of gross domestic product (GDP) in 2015.
“In addition, lower commodity prices could also hit economic growth via government spending. The problem is that lower oil prices would worsen the government’s fiscal balance as weaker revenue offsets the benefit from lower subsidies,” it says.
“The Malaysian government derives about 30% of its annual revenue from the oil and gas sector, mainly through national oil company Petroliam Nasional Bhd (Petronas). It had estimated crude oil prices to average at US$105 a barrel this year.”
According to Credit Suisse, a 10% fall in oil prices could increase Malaysia’s fiscal deficit by 0.1 to 0.3 percentage point of GDP.
“With limited room to raise revenue to meet its budget deficit target of 3% of GDP (from 3.5% this year), the government will likely need to cut back on spending. As such, we see downside risks to our 2015 GDP growth forecast of 5%, with private consumption bearing the brunt of the adjustment,” explains the financial group, which expects Malaysia’s GDP to grow 5.9% this year.
Cheaper commodities
At present, major commodities that concern Malaysia, such as crude oil and crude palm oil, are hovering at their four-year lows.
Brent crude oil, the benchmark price for products in Europe and Asia, for instance, was quoted at US$84.71 per barrel on Wednesday, which represented a decline of 26.4% from its peak this year of US$115.06 per barrel on June 19.
The sharp decline in crude oil prices comes amid rising concerns of a global economic slowdown, which could dampen demand. Prices of the commodity are also under pressure due to the current high supply of oil, while the recent strengthening of the US dollar has only exacerbated the weakening of the prices of greenback-denominated commodities.
Over the week, CNN quoted a reputable bond investor as saying that global oil prices could drop by a further US$10 per barrel from the present levels.
“I’m convinced that Saudi Arabia wants the price of oil at US$70,” said Jeffrey Gundlach, CEO and chief investment officer of US-based fund management company DoubleLine.
Several bankers such as Bank of America Corp and BNP Paribas SA, nevertheless, believe global oil prices will not drop below US$80 a barrel.
Some economists believe that the global oil prices would remain weak over the medium term unless the Organisation of the Petroleum Exporting Countries (Opec) cuts its supply. Opec currently accounts for about 40% of global crude oil supply.
According to economists, global oil prices could also rebound if economic growth in Europe and Asia picks up steam as that could boost demand for the commodity.
Meanwhile, the weak oil prices will likely dampen the prospects of crude palm oil, as it renders investments in bio-fuels less attractive.
As it is, the prices of crude palm oil are already weak at RM2,171 per tonne as of Thursday, compared with the year’s peak of RM2,901 per tonne on March 10.
A uniform fall in commodity prices across the board would be net negative for Malaysia, Morgan Stanley Research says in its recent report entitled, “What if Crude Oil Prices Remain Lower for Longer?”
The international investment bank argues that declining oil prices alone will have a small negative impact on Malaysia as a net oil exporter with a very small oil trade surplus.
Boon or bane?
On a positive note, economists argue that the falling oil prices would not only reduce the subsidy burden for Malaysia, but it would also give further room for the Government to reform the current blanket subsidy scheme for fuel prices.
Morgan Stanley has estimated that every 10% drop in oil prices will translate into a fuel-subsidy savings of 0.5% of GDP for Malaysia.
Currently, only RON95 petrol and diesel sold at local pump stations are subsidised.
Early this month, the Government made a surprise move to cut subsidies for fuel sold at local pump stations. The move resulted in RON95 petrol and diesel prices rising 20 sen per litre to RM2.30 and RM2.20, respectively.
The Government has expressed its intention to eventually float retail pump prices according to market rate, while providing a more targeted-based petrol subsidy to the low-income group.
According to AmResearch, the breakeven of the global crude oil price is at an average of US$84.80 per barrel if RON95 were to remain at RM2.30 per litre without the government subsidy.
Credit Suisse concurs, noting that if oil prices were to stay at around US$80 to US$83 per barrel on a sustained basis, the government’s petrol and diesel subsidy bill should be eliminated completely in 2015, even without further fuel subsidy reform by the Malaysian Government.
For Budget 2015, the Government has allocated RM37.7bil for total subsidies, of which fuel accounts for a major portion based on its expectation that the Brent crude oil price would average at US$100 per barrel next year.
“The gap between international and subsidised fuel prices has already narrowed significantly even before the big move in oil prices in the past few weeks, thanks to the Government’s fuel price hike in October,” it explains.
“Hence, in this scenario, even if the government were to restrict the supply of subsidised fuels to lower income households, it should have negligible impact on headline inflation,” it adds.
Meanwhile, CIMB Economics Research argues that falling oil prices may not be all bad for Malaysia’s economy. The institution points Malaysia can benefit from the recent fall in global oil prices, particularly if global demand is aided by higher discretionary incomes, which then feed into export demand.
While CIMB Research acknowledged that Malaysia’s government oil revenue would be affected by weaker global oil prices, it argues that there would not be a real risk to the fiscal deficit target of 3% of GDP next year, given the stable dividends from Petronas.
“On the upside, the government’s subsidy savings can either be used to bring down the fiscal deficit or be channelled towards productive spending,” it says.
25/10/2014 (The Star) - The downside risk to economic growth seems to have increased for Malaysia in the face of falling global commodity prices.
Several economists have in recent weeks flagged their concerns over the potential negative impact the current trend, if prolonged, could have on the country, which relies on oil for revenue and a wide range of other commodities such as crude palm oil for export earnings. They note that Malaysia, as a major commodity exporter, could likely see lower export earnings under the present environment and this could add pressure on the country’s current account.
Credit Suisse Group, for one, points out that weaker commodity prices can have a direct negative impact on Malaysia’s growth through two channels.
“First, it reduces the disposable incomes of consumers, especially in the rural areas, and secondly, it lowers exports and the terms of trade, given Malaysia’s high exposure to a broad range of commodities,” the multinational financial services group explains in its recent report.
According to Credit Suisse, Malaysia looks vulnerable under the present environment of weaker commodity prices, and could potentially see its current account surplus narrow by around 0.5 to 0.8 percentage point from its estimated 4% of gross domestic product (GDP) in 2015.
“In addition, lower commodity prices could also hit economic growth via government spending. The problem is that lower oil prices would worsen the government’s fiscal balance as weaker revenue offsets the benefit from lower subsidies,” it says.
“The Malaysian government derives about 30% of its annual revenue from the oil and gas sector, mainly through national oil company Petroliam Nasional Bhd (Petronas). It had estimated crude oil prices to average at US$105 a barrel this year.”
According to Credit Suisse, a 10% fall in oil prices could increase Malaysia’s fiscal deficit by 0.1 to 0.3 percentage point of GDP.
“With limited room to raise revenue to meet its budget deficit target of 3% of GDP (from 3.5% this year), the government will likely need to cut back on spending. As such, we see downside risks to our 2015 GDP growth forecast of 5%, with private consumption bearing the brunt of the adjustment,” explains the financial group, which expects Malaysia’s GDP to grow 5.9% this year.
Cheaper commodities
At present, major commodities that concern Malaysia, such as crude oil and crude palm oil, are hovering at their four-year lows.
Brent crude oil, the benchmark price for products in Europe and Asia, for instance, was quoted at US$84.71 per barrel on Wednesday, which represented a decline of 26.4% from its peak this year of US$115.06 per barrel on June 19.
The sharp decline in crude oil prices comes amid rising concerns of a global economic slowdown, which could dampen demand. Prices of the commodity are also under pressure due to the current high supply of oil, while the recent strengthening of the US dollar has only exacerbated the weakening of the prices of greenback-denominated commodities.
Over the week, CNN quoted a reputable bond investor as saying that global oil prices could drop by a further US$10 per barrel from the present levels.
“I’m convinced that Saudi Arabia wants the price of oil at US$70,” said Jeffrey Gundlach, CEO and chief investment officer of US-based fund management company DoubleLine.
Several bankers such as Bank of America Corp and BNP Paribas SA, nevertheless, believe global oil prices will not drop below US$80 a barrel.
Some economists believe that the global oil prices would remain weak over the medium term unless the Organisation of the Petroleum Exporting Countries (Opec) cuts its supply. Opec currently accounts for about 40% of global crude oil supply.
According to economists, global oil prices could also rebound if economic growth in Europe and Asia picks up steam as that could boost demand for the commodity.
Meanwhile, the weak oil prices will likely dampen the prospects of crude palm oil, as it renders investments in bio-fuels less attractive.
As it is, the prices of crude palm oil are already weak at RM2,171 per tonne as of Thursday, compared with the year’s peak of RM2,901 per tonne on March 10.
A uniform fall in commodity prices across the board would be net negative for Malaysia, Morgan Stanley Research says in its recent report entitled, “What if Crude Oil Prices Remain Lower for Longer?”
The international investment bank argues that declining oil prices alone will have a small negative impact on Malaysia as a net oil exporter with a very small oil trade surplus.
Boon or bane?
On a positive note, economists argue that the falling oil prices would not only reduce the subsidy burden for Malaysia, but it would also give further room for the Government to reform the current blanket subsidy scheme for fuel prices.
Morgan Stanley has estimated that every 10% drop in oil prices will translate into a fuel-subsidy savings of 0.5% of GDP for Malaysia.
Currently, only RON95 petrol and diesel sold at local pump stations are subsidised.
Early this month, the Government made a surprise move to cut subsidies for fuel sold at local pump stations. The move resulted in RON95 petrol and diesel prices rising 20 sen per litre to RM2.30 and RM2.20, respectively.
The Government has expressed its intention to eventually float retail pump prices according to market rate, while providing a more targeted-based petrol subsidy to the low-income group.
According to AmResearch, the breakeven of the global crude oil price is at an average of US$84.80 per barrel if RON95 were to remain at RM2.30 per litre without the government subsidy.
Credit Suisse concurs, noting that if oil prices were to stay at around US$80 to US$83 per barrel on a sustained basis, the government’s petrol and diesel subsidy bill should be eliminated completely in 2015, even without further fuel subsidy reform by the Malaysian Government.
For Budget 2015, the Government has allocated RM37.7bil for total subsidies, of which fuel accounts for a major portion based on its expectation that the Brent crude oil price would average at US$100 per barrel next year.
“The gap between international and subsidised fuel prices has already narrowed significantly even before the big move in oil prices in the past few weeks, thanks to the Government’s fuel price hike in October,” it explains.
“Hence, in this scenario, even if the government were to restrict the supply of subsidised fuels to lower income households, it should have negligible impact on headline inflation,” it adds.
Meanwhile, CIMB Economics Research argues that falling oil prices may not be all bad for Malaysia’s economy. The institution points Malaysia can benefit from the recent fall in global oil prices, particularly if global demand is aided by higher discretionary incomes, which then feed into export demand.
While CIMB Research acknowledged that Malaysia’s government oil revenue would be affected by weaker global oil prices, it argues that there would not be a real risk to the fiscal deficit target of 3% of GDP next year, given the stable dividends from Petronas.
“On the upside, the government’s subsidy savings can either be used to bring down the fiscal deficit or be channelled towards productive spending,” it says.