‘Reality check’ for Malaysia as oil slump worsens, economists say

Women pay their bills at a wet market in Shah Alam outside Kuala Lumpur January 22, 2014. — Reuters pic
Women pay their bills at a wet market in Shah Alam outside Kuala Lumpur January 22, 2014. — Reuters pic

KUALA LUMPUR, Dec 17 — The continued fall in oil price could push Malaysia’s trade balance into negative territory within the first three months of 2015, putting the country’s credit rating in possible jeopardy.

Despite Putrajaya’s insistence that the economy is robust enough to withstand the drop in oil revenue, economists from Bank of America Merrill Lynch and AllianceDBS are forecasting that Malaysia’s current account will enter a deficit in addition to the country falling short of both growth and deficit reduction targets, according to Singapore’s Business Times today.

Malaysia registered a trade surplus of just RM1.2 billion in October as exports fell 3.1 per cent to RM65 billion, according to figures from the Department of Statistics.

BofA economist Chua Hak Bin is predicting that the Malaysian government will miss its stated goal of cutting the chronic Budget deficit to 3 per cent of the economy, saying that this would more likely come in at 3.8 per cent.

“Risk of the fiscal deficit blowing out to over 5 per cent of GDP cannot be dismissed, as weaker growth and corporate profits could also cut other tax revenue,” Chua was quoted as saying in the BT report.

Manokaran Mottain from AllianceDBS warned that Malaysia is “risking a sovereign rating downgrade” with the expected shortfall in deficit reduction.

Manokaran is also projecting both a balance of payments deficit as well as a worsening deficit arising from the sharp fall in oil prices.

AllianceDBS previously revised its 2015 growth estimate for Malaysia to 5 per cent from 5.2 per cent, but is now cautioning that this could slip further to between 3 and 4 per cent for the year.

Oil has fallen by around 40 per cent since June and is now hovering around the US$60 per barrel mark, hammering the income of oil companies including state oil firm Petronas that contributes to nearly a third of the Malaysian government’s revenue.

Malaysia’s oil-related revenue totalled RM63 billion in 2013, accounting for 29.5 per cent of total government income.

The expected decline in oil revenue has triggered an exodus from Malaysian bonds and forced the ringgit down to levels unseen since the 1997 Asian Financial Crisis.

The ringgit is currently trading at RM3.50 against the dollar, down from a high of RM3.10 earlier this year.

Malaysia is also reeling from falling commodity prices for two of its major exports, palm oil and rubber, while domestic consumption that customarily props up the economy is also set to slow next year on weaker consumer sentiments, inflation and the introduction of the goods and services tax.