Malaysia: Firm economic principals to ensure stability

PETALING JAYA: Malaysia’s fiscal position and its economy is not expected to take a hit amid pressures and volatility in the global oil market.

The nation as a net exporter of the commodity has buffers in the form of oil royalties which would cushion any impact from potential lower oil prices and not affect its fiscal position despite lower revenues, according to economists and oil analysts.

Furthermore, they concurred that the country’s firm economic fundamentals backed by resilient consumption, higher trade surplus and investment inflows would ensure economic stability, hence not impacting its fiscal position.

Most analysts expect oil prices to trade in the range of US$70 (RM326) to US$80 (RM372) per barrel this year, but added it could breach US$100 (RM465) if the Organisation of the Petroleum Exporting Countries and its allies’ (Opec+) succeed in cutting down oil supplies and geopolitical risk intensifies.

The government had incurred the 26th consecutive year of budget deficit since 1998 on a narrow revenue base relative to high commitment of operating expenditure (largely unsustainable subsidies).

Malaysia University of Science and Technology professor Geoffrey Williams.Malaysia University of Science and Technology professor Geoffrey Williams.

Elaborating on oil prices and its impact on the country, University of Science and Technology economics professor Geoffrey Williams told StarBiz the price of crude has fallen from its peaks around the second quarter of last year and are currently down almost half.

He said this would affect the revenue of Petroliam Nasional Bhd (PETRONAS) for the government, noting that so far the national oil company’s first quarter results were good and the projection for the oil royalties is around RM35bil to RM40bil this year which is still strong.

“In addition, lower oil prices reduces the petrol subsidy bill by about half this year and that releases money for other priorities.

“So long as PETRONAS retains enough for long-term projects it is very stable despite the fall in oil prices.

“The forecast of oil royalties at around RM35bil to RM40bil and the estimated oil subsidies for this year is around RM26bil.

“So this is better than last year when oil income and subsidies were about equal.

There is a potential RM10bil-RM15bil premium that can be used for other areas, and so this improves the fiscal position from non-tax sources if tax income is lower than expected,” he added.

Williams said in the absence of any major crisis or shock, he expects Brent crude to continue to trade between US$70 (RM326) and US$80 (RM372) per barrel as this looks like the target range preferred by Opec members.

As at press time, the international benchmark Brent crude was down by 1.68% to US$72.55 (RM340) per barrel.

Brent crude oil prices averaged at US$101 (RM470) per barrel in 2022, compared with about US$71 (RM330) in 2021.

As for the headwinds in the crude oil arena, he said this would include the likely recession in the United States, the current recession in Europe and the lower than expected impact of China’s reopening.

He said this would impact global growth and lower the demand for oil. Faced with this scenario, he said oil suppliers are cutting supplies to keep prices up and avoid a glut.

Juwai IQI global chief economist Shan Saeed, who is forecasting crude oil prices to be between US$83 (RM386) and US$127 (RM591) for the year, said there are headwinds which could in the next two quarters change the script of the global economy and lower oil prices.

This involves the appreciation of the US dollar and the increase in oil production in the event the Iran and the United States nuclear deal is resolved, he said.

Citing Nobel Laureate the late US economist Milton Friedman where he viewed financial stability issues primarily through the lens of nominal income and the money stock, Shan said: “Friedman believed that if both were kept on a stable growth path, then financial stability would follow in most cases.

“Presently in Malaysia, monetary policy remains stable and a key driver in the policy lever to support growth stability.

“Even with lower oil prices, economic fundamentals can sustain the pressure with solid consumption, higher trade surplus and strong investment inflows.

“Growth stability is tantamount to strong consumption and solid investment.

“We are buoyant on the Malaysian economic outlook with gross domestic product meandering around 4.5% to 5.5% in 2023,” he said.

However, Shan said there are factors which could raise oil prices this year.

The depreciation of the US Dollar Index by 5% to 10% in the fourth quarter of the year, the expected production cuts by Opec in September or October this year and geopolitical risk going deeper into the energy market, he said would push up oil prices.

“The probability of higher oil prices remains between 55% and 65% according to our market intelligence report.

”Higher oil prices will benefit the government in the form of fiscal consolidation, stronger balance sheet, reduction in budget deficit, strengthening ringgit and above all, higher market cap of oil and gas companies,” he said.

OCBC Bank economist Lavanya VenkateswaranOCBC Bank economist Lavanya Venkateswaran

OCBC Bank economist Lavanya Venkateswaran expects Brent oil to average US$90 (RM419) per barrel this year based on higher forecast of oil prices going forward given expectations for supply to tighten and demand to steady, albeit at lower levels than in 2022.

“Petroleum prices will have an impact on Malaysia’s trade and fiscal positions.

“The economy has been a net petroleum exporter in recent years suggesting that lower global oil prices could worsen the terms of trade effect.

“On the fiscal front, petroleum-related revenues were 28% of total revenues in 2022, which means that lower oil prices can hurt revenue collections.

That said, the government average global crude oil price assumption is US$80 (RM372) per barrel for 2023 and so far, oil prices are within its expectation,” she said.

UCSI University assistant professor in finance Liew Chee YoongUCSI University assistant professor in finance Liew Chee Yoong

UCSI University Malaysia assistant professor of finance Liew Chee Yoong, who is also a research fellow at the Centre for Market Education, feels there is a risk that crude oil prices would increase this year as Opec may further reduce their oil supplies.

Furthermore, he said the geopolitical risks and tensions remained high as a result of the continuing Russian-Ukraine conflict and the possibility that Israel would launch a pre-emptive strike on Iran due to the latter’s nuclear programme.

All these would drive up crude oil prices globally, he said.

Liew said to address the impact of higher oil prices on the nation’s fiscal position, the government could consider some measures.

“One of them is by diversifying revenue sources by reducing dependency on oil revenue by diversifying the economy and expanding other sectors, such as manufacturing, services, tourism, and technology.

This will help mitigate the impact of oil price fluctuations on the fiscal position.

“The government needs to have fiscal discipline and budget management by controlling government expenditure, reducing wasteful spending, and prioritising developmental projects that yield long-term economic benefits.

“It also needs to rationalise subsidies by gradually reducing or rationalising fuel subsidies to reflect market prices and promote energy efficiency.

“This can help alleviate the subsidy burden on the government and encourage more efficient use of energy resources.

“The government also needs to build strategic reserves,” he noted.

During periods of high oil prices, Liew said the government could allocate a portion of the additional revenue to build strategic reserves or establish stabilisation funds.

These reserves can be utilised during periods of low oil prices to maintain fiscal stability and protect the economy from external shocks.