Exports to US may cushion Malaysia's oil revenue losses, says economist

World Bank's Frederico Gil Sander noted that Trade in Value Added indicates a direct correlation between US consumption and export revenue for Malaysia and said that a gorwing US economy may benefit Malaysia. — AFP pic
World Bank's Frederico Gil Sander noted that Trade in Value Added indicates a direct correlation between US consumption and export revenue for Malaysia and said that a gorwing US economy may benefit Malaysia. — AFP pic

KUALA LUMPUR, Feb 4 — The strengthening US economy may provide relief to Malaysia’s uncertain economic outlook this year, with the Southeast Asian country’s value-added exports expected to rise as American consumption improves, a World Bank economist said today.

Frederico Gil Sander, the World Bank’s senior country economist for Malaysia, said external markets remain an important contributor to the country’s gross domestic product (GDP), with Trade in Value Added accounting for just under half of Malaysia’s GDP of RM519.2 billion as at 2009.

“Malaysia contributes 18 per cent of value-added to exports that ultimately are consumed by the US, so hopefully that will offset the dip in revenue from oil in Malaysia,” he said at a World Bank presentation on the global outlook for the year.

Trade in Value Added is a mechanism that quantifies the value added by each country in the global production chain of a product all the way to the consumer country.

Gil Sander admitted that his outlook on Malaysia’s value-added exports is based on 2008 to 2009 estimates, but noted that Trade in Value Added indicates a direct correlation between US consumption and export revenue for Malaysia.

“So when the US economy starts growing faster, that suggests an upside for Malaysia,” he said.

Gil Sander also said Putrajaya should implement medium-term reforms that would help prepare the country to face economic shocks such as the plunge in global crude oil prices over the past seven months.

He said it will be prudent for the federal government to prepare a plan on how to help lower income households without reintroducing subsidies when oil prices inevitably rebound.

“There are challenges in the outlook, but it’s definitely not a crisis. Actually this is a good time to prepare, for example, for when oil prices go up and if there will be pressures to reintroduce subsidies.

“Now is the time to actually come up with a good plan in terms of mitigating the (increase in the) cost of living, which may happen a year from now, two years from now,” he said.

Last month, Prime Minister Datuk Seri Najib  Razak unveiled a host of spending cuts to Budget 2015 aimed at helping Malaysia weather oil prices that have fallen by more than half since last year.

Facing a drop in government revenue of RM8.3 billion, Putrajaya is targeting to reduce operational expenditure by RM5.5 billion in order to reduce the government’s chronic overspending.

The new budget for Malaysia, a net oil exporter, will be based on a projected crude oil price of US$55 (RM197.60) per barrel this year, compared to the US$100 per barrel used in the Budget 2015 announced last October. 

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