THE drop in crude oil prices has not turned out to be a benefit many thought it will be.
For the man in the street, it will mean lower prices at the pump but for the rest of the economy, it can be bad news albeit with a few silver linings.
As crude oil prices slump, with the benchmark brent now slipping below US$70 a barrel again, the effect on the capital markets has been pronounced.
Lower crude oil prices have hit the capital markets hard. Bond yields are up and stock prices are down.
The selldown has consigned the FTSE Bursa Malaysia KLCI Index to the second worst performing stock market in Asia this year, with only the Mongolian stock market performing worse.
The FBM KLCI is down 6.3% year-to-date. In comparison, most stock markets are up over the same period as optimism brews that lower crude oil prices will lift economic growth.
The selloff in the capital markets has weighed on the ringgit which is now at a near five-year low against the dollar. The steep decline in the ringgit that has prompted Bank Negara to jump into action by warning traders against speculation in the ringgit.
Compounding matters and sending the ringgit down yesterday was the drop in exports. Exports for October fell 3.1% from the same period last year and the trade surplus for October was RM1.2bil.
Exports of petroluem products was RM5.9bil that month but fell 19.1% from September. LNG exports amounted to RM5.5bil. Brent crude prices was around US$94 and US$85 a barrel in that month versus today’s price of below US$70 a barrel.
The weaker ringgit is nonetheless good for the economy in general as it will make Malaysian exports cheaper and possibly help future export growth.
That should apply to merchandise exports but with exports of oil and gas which is about a fifth of external trade and with prices dropping, that will mean lower receipts of such products.
As a trade-dependent country, the weaker ringgit will help other exports but will also translate into higher costs of imported goods. When the cost of living is an ongoing issue, that could become a burden for many citizens.
Worst still have been corporate results. After a bad earnings season where more companies disappointed with their financial results, the outlook for corporate profit growth is bleak. The danger with weak profits is cost cuts and job losses.
“We advocate a more defensive portfolio in 2015, and to position for stronger earnings in 2016,” says Maybank Investment Bank Bhd in a note yesterday.
The impact on government revenue
The biggest talking point following the drop in crude oil prices and the cut in fuel subsidies has been around government revenue and the fiscal deficit.
The Government is targeting a 3% fiscal deficit and a switch from blanket subsidies to a managed float should allow the Government to achieve that.
What worries many economists is the impact of lower crude oil on government revenue. Warnings of over-dependence on petroleum money has been given for many years, especially following the boom in oil prices in mid-2000s.
The rise of crude oil prices during that time lifted its contribution to government coffers from 29.1% in 2005 to a peak of 40.3% in 2009.
That percentage has been decling since and last week Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar said the drop in crude oil prices would have minimal impact on government revenues and finances.
That was due to the Government reducing its reliance on petrodollars over the past few years.
He said that in 2011, petroleum accounted for 35.8% of government revenue and that fell to 33.7% in 2012 and was 31.2% last year.
“It is hoped that the dependency would be reduced to below 30%,” he told Bernama.
It is projected that petroleum receipts will account for 29.7% of government revenue in 2014 and 26.5% next year.
Citibank in its note estimates that the elimination of petroleum subsidies would save the Government RM13bil-RM14bil next year.
The line in the sand
Although Petronas warned that its dividend payment to the Government might fall with oil prices, estimates are that it will remain relatively constant.
“Despite Petronas’ warning that its payouts to the Government (including the Petronas dividend) would fall 37% with Brent prices at US$75/bbl (or Tapis at US$80/bbl), the Petronas dividend is an exogenous policy variable insensitive to oil prices in the short term.
“In 2009, when Tapis averaged just US$64/bbl, the dividend was RM30bil. On balance, assuming a fixed Petronas dividend but cuts in other oil revenues, we estimate US$70/bbl Tapis price would still yield a deficit of around 2.8% to 3% of GDP,” Citibank says.
Its sensitivity analysis on the impact of lower crude oil price using Petronas data shows that should crude oil prices hit US$65 to US$60 a barrel, then the fiscal deficit will miss its target. At US$65 a barrel, it estimates that the fiscal deficit will be 3.08% and with Brent at US$60 a barrel, the fiscal deficit will be 3.2% of GDP.
Using Budget 2015 numbers and Tapis crude oil price for reference, the Government is expected to miss its 2015 fiscal target of 3% should crude oil hit US$60 a barrel. The deficit at that price is projected to be 3.04%.
Then there is the effect on trade.
With CPO prices falling in tandem with crude oil prices, the impact on export receipts is also telling.
“Including refined petroleum products, Malaysia ran a small petroleum trade deficit of RM1.9bil in January-September such that lower crude prices alone may be neutral or even net positive for the trade position and the ringgit.
“As net exports of vegetable oils and gas were a larger 54.5% and 72.4% of trade surplus (vs 9.8% for crude oil), a larger current account impact may be felt via concurrent falls in CPO and LNG prices,” it says, adding that there will also be an impact on investments as lower oil and gas capex poses a risk to fixed investments as they accounted for a third of the net increase in capital stock from 2010-2012.
Should oil prices continue its slide, there is then the possibility of the dreaded twin deficits – in the fiscal and current account.
A shrinking current account surplus, amid a slowdown in export growth, has some wondering if a deficit in the current account could materialise for the first time since the Asian financial crisis.
“We expect a small current account deficit as early as the first quarter of 2015,” AllianceDBS Research chief economist Manokaran Mottain says.
Not all gloom
The weaker ringgit does not mean that all businesses in Malaysia will suffer. For one, the large manufacturing sector dominated by the electrical and electronics segment should see exports rise.
Lower energy prices is expected to help with global growth and Schroders in a report yesterday said that based on simulations from the Oxford Economics Forecasting model, the 20% fall in oil prices would add about 0.5% to 2015 growth in the world economy and take 1% off 2015 inflation.
The electronics industry in Penang is anticipating a vibrant first-quarter in 2015, which is normally a slower period.
Although the ringgit has fallen against the dollar and a number of other currencies, it has strengthened against the yen.
That might help the struggling auto distributors of Japanese marques in the country.
Other beneficiaries will be glove makers. Companies that rely on export markets for their products could also capitalise on the weaker ringgit against the dollar.
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