KUALA LUMPUR -- Investors are taking an increasingly critical view of the Malaysian economy amid fears that the major oil-exporting country might start running current-account and fiscal deficits at the same time due to the recent plunge in oil prices.
Malaysia became one of the first major Asian countries to recover from the 2008 global financial crisis and its gross domestic product has been growing at a pace of more than 5% on the strength of brisk consumer spending and oil prices that were stable until the first half of last year.
But with crude oil prices now tumbling below $50 per barrel, Malaysia's reliance on oil exports could become a drag on its economy.
Refueling his car at a gas station, Azmi Yusof, a civil servant, was not cheering the 17% drop in gas prices in the past four months. "The price hikes in essentials, such as food and daily household items, have taken up all the savings from petrol expenses," the father of four school-age children lamented.
Such dampened sentiment echoes the economic environment in Malaysia. A clearer image of the economic impact from the oil price plunge emerged toward the end of last year.
State-owned oil company Petronas warned in December that its contribution to government revenues in 2015 could be lower at 43 billion ringgit ($12 billion), instead of the previously projected 68 billion ringgit, if oil prices remain around $75 per barrel. The company, which suffered a year-on-year fall of 14% in its July-September net profit, cautioned that the fourth quarter's earnings could be much lower than the third quarter, as oil prices deteriorate on a supply glut.
Twin deficits looming?
The government has acknowledged the "significant change" in the global economic landscape and its impact on Malaysia, and has revealed measures to mitigate the situation. Prime Minister Najib Razak announced Jan. 20 that his government will cut 2% from the 273.9 billion ringgit in 2015's budget, which was drafted based on an oil price of $100 per barrel.
The 5.5 billion ringgit saving will come from slashing the government's operating expenditures such as supplies and services, and grants allocated to state-owned companies. These are "proactive initiatives to make the necessary adjustments following the challenging external developments," Najib said in a special address broadcast live nationwide. Last December, the government removed fuel subsidies that amounted to 23.5 billion ringgit in 2013.
The country is running a deficit, and the outstanding balance of government debt is equivalent to around 55% of GDP, the highest among Southeast Asian nations. Fiscal consolidation should help Malaysia in its effort to hold on to foreign and other investors. But a resultant cut in spending is expected to hurt the earnings of companies including construction firms. A 6% goods and services tax due to be introduced in April could also dampen consumer spending.
The government has revised downward its forecast for 2015 on the average baseline oil price of $55 per barrel. Malaysia now faces a revenue shortfall of 13.8 billion ringgit. As such, the GDP growth forecast has been adjusted to 4.5-5.5%, down from a higher projection last October. The country is also expected to record fiscal deficit equal to 3.2% of GDP, instead of the 3% previously targeted.
Malaysia now wants its state-linked companies to invest domestically and refrain from buying assets abroad. It will waive the visa fee requirement for foreign tourists, notably from China, to encourage tourism.
Speculation is also growing that the country, a net exporter of oil, will see the value of its exports contract significantly due to the steep fall in oil prices.
Late last year Minister in the Prime Minister's Department Abdul Wahid Omar declared that Malaysia will continue to run a current-account surplus in both 2015 and 2016, in an apparent effort to dispel speculation.
The country's current-account surplus has been declining ever since peaking in 2008. Lower crude oil prices are putting pressure on Malaysia's crude palm oil, a key source of export revenue. Crude palm oil exports to China, one of the biggest buyers of the commodity, slumped 22% on the year to 2.58 million tons in the January-November period of 2014. While the country recorded 20% year-on-year growth in its trade surplus over the same period, boosted mainly by electronics products, analysts are warning of a potential deficit in the months ahead.
Already, investor money is fleeing from Malaysia. Total sales of Malaysian stocks by foreign investors topped $2 billion in 2014, the highest figure since the 2008 financial crisis, according to MIDF Research. The sell-off appears to be continuing this year.
Bursa Malaysia, the country's stock exchange, recorded a 5% year-on-year decline in average daily turnover to 2.037 billion ringgit in 2014.
The ringgit has declined nearly 12% against the dollar in the last six months to 3.58 on Jan. 16. In anticipation of the U.S. Federal Reserve's policy normalization, regional currencies such as the Singapore dollar and the Indonesian rupiah have also fallen, but Malaysia's reliance on oil income has worsened the ringgit's plunge, according to analysts.
Poor market sentiment has derailed a planned merger of three local lenders. CIMB Group Holdings and two others ceased talks on Jan. 14 on creating Malaysia's largest bank by assets.
While all three banks were convinced that the initial proposal to merge, announced last July, followed "sound logic," the fast-changing economic landscape that ensued has made the deal unattractive. "The significant change in oil prices and currency exchange rates, as well as the challenging outlook for the financial services industry," were the main reasons behind the pullout, CIMB's acting group chief executive said in an internal memo to his staff.
In a recent report, CIMB Research projected loan growth of 10% in 2015 for the Malaysian banking sector, on par with the level in 2014, as growth in mortgages slows. In addition, the brokerage expects banks to face other challenges such as the implementation of the goods and services tax in April, which may dent consumer spending.
Adding to the woes is the high debt accumulated by 1Malaysia Development (1MDB), the sovereign wealth fund that has put Malaysia on the radar of ratings agencies. 1MDB, which has investment interests in the energy and real estate sectors, has amassed debt of 41.9 billion ringgit in the year to March 31, 2014, up from 36.2 billion ringgit a year earlier. Local media reported recently that the fund manager has twice missed loan payments of 2 billion ringgit, mainly to domestic lenders. Fitch Ratings in a Jan. 6 report expressed concern about the "contingent liabilities" on Malaysia's A credit rating, and said it was following developments closely, according to Bloomberg.
Malaysia managed to stage a quick recovery from the 2008 financial crisis as ample oil revenue allowed the government to boost spending. As the fall in oil prices has deprived the government of the means to help the economy make a similar comeback, the country must find a new solution to address its economic woes.
Azmi, the civil servant, expressed concerns about the impending the goods and services tax, which will add to the burden on his household. "I hope it won't get worse," he said of the country's sagging economy.