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Malaysia: High oil prices and their impact on local economy
PETALING JAYA: Soaring oil prices sparked by the Russia-Ukraine war could impact the domestic economy, fanning inflationary pressures and higher cost of living.
While rising oil prices would boost the government’s revenue, the higher cost of living would burden the lower income segment and smaller businesses, according to economists.
At press time, the international benchmark Brent crude was trading at close to US$98 (RM412) per barrel, down 1.16%.
West Texas intermediate (WTI) was at US$92 (RM386) per barrel.
Last Thursday, Brent breached the US100 (RM 420) a barrel for the first time since 2014, when it hit a high of US$102.48 (RM430.42) a barrel.
AmBank Group chief economist Anthony Dass, who is projecting oil price to touch US$120 (RM504) to US$150 (RM630) a barrel this year, told StarBiz that while the increase in oil price would bode well for the economy, it would escalate into a higher cost of living
The oil and gas sector accounts for about 6.2% of the gross domestic product (GDP) and petroleum related revenue makes up around 19.4% of the government revenue in 2021.
“Our estimation showed for every US$1 (RM4.20) increase in the price of Brent a barrel, it should provide an additional RM646mil to the country’s annual real GDP. Every 1% gain in Brent oil price, would lift the domestic GDP by 0.042%.
“The positive benefits from higher oil prices also add upward pressures on inflation. For every US$1 (RM4.20) increase in Brent oil price is associated with an increase in consumer price index (CPI) by about 0.03% or every 1% increase in Brent oil prices is associated with 0.014% increase in CPI,” said Dass, who is also a member of the Economic Action Council Secretariat.
The CPI increased 2.3% to 124.9 in January 2022 from 122.1 in the same month of the preceding year, according to the Statistics Department. The increase surpassed the average inflation for the period of 2011 to January 2022 (1.9%).
The headline inflation was mainly driven by the increase in the transport group and food and non-alcoholic beverages.
He said it was important to take note of the subsidy payout as well due to higher prices.
For instance, the government would have spent around RM8bil on fuel and cooking oil subsidies in 2021, more than double the RM3.78bil originally allocated, he said.
In 2019, the government spent RM6.32bil and RM2.16bil in 2020 in fuel subsidies.
“For 2022, we can expect higher subsidies. Hence, a higher GDP, which is also being accompanied by higher CPI after taking into account the subsidies, would still add upwards pressure on the underlying prices.
“While the higher oil price would lift economic growth, it is likely to be accompanied by higher living costs driven by higher inflation. This will continue to hurt those in the B40 and M40 segments as well as the micro, small and medium enterprises,” Dass said.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the Russia-Ukraine war would have an impact on the economy.
“The government may incur higher fuel subsidies as the country is relying on imports for domestic fuel consumption. As fuel subsidies are still in place, the impact on inflation, to an extent, can be insulated.
“However, the big picture is how the war would evolve going forward, especially in respect to its duration and intensity. Since it may involve the super powers, the concern would be on the scale of the war which could expand beyond the current trajectory.
“In short, the war could be another form of downside risk which could shock the economy if it blows out of proportion,” he said.
Meanwhile, Juwai IQI global chief economist Shan Saeed said he expects the global economy to head towards stagflation i.e. higher inflation and lower growth.
On the home front, he expected domestic inflation to remain subdued as Bank Negara has effective policy levers to control price levels.
“Overall, the central bank has performed a good job in terms of price, growth, and financial market stability in the last 10 years. It has played its cards well and has plenty of room to manoeuvre in the monetary policy structure. Inflation can be controlled through effective monetary tools like raising the overnight policy rate and by an appreciating ringgit.Shan anticipated oil prices to hover from US$77 (RM323) to US$107 (RM449) per barrel in 2022. This is on the premise that deeper geopolitical and strategic risk, supply constraints and the depreciating dollar which would support the bullish curve in the oil market, he said, adding that the oil market is moving into backwardation phase i.e. spot oil price is higher than the future price.
Shan: Inflation can be controlled through effective monetary tools.
Gas prices are also expected to continue rising to US$7 (RM29) per gallon. “
The geopolitical risk and supply constraints would make it inevitable that gas prices will rise to US$5 (RM21) a gallon, and possibly as high as US$6.50 (RM27) or US$7 (RM29) once crude brent oil reaches US$100 (RM420) a barrel,” Shan said.
Economist Shankaran Nambiar, who is head of research at the Malaysian Institute of Economic Research, said oil price would likely stay between US$100 (RM420) and US$150 (RM630) this year and would settle around US$120 (RM504).
“Much as government expenditure will see fresh impetus from increased revenue, the negative side will come in the form of increased inflationary pressures,” he said.
Source: https://www.thestar.com.my/business/business-news/2022/02/28/high-oil-prices-and-their-impact-on-local-economy