Malaysia’s 2005 growth may moderate if oil price stays high

  • Business
  • Wednesday, 31 Aug 2005

MALAYSIA'S economic growth is likely to moderate along with the US and other countries' if the price of crude oil remains around US$70 per barrel, economists said. 

On Monday, concerns that Hurricane Katrina would disrupt offshore activities in the Gulf of Mexico pushed crude oil futures for October delivery to close at US$67.20, after touching a record high of US$70.80 a barrel on the New York Mercantile Exchange in Asian trading. 

“The surge of oil prices was a fear factor and not due to supply or demand,” said Prof Dr Mohamed Ariff, executive director of Malaysian Institute of Economic Research (Mier). 

He noted that Malaysia, being a net oil exporter, would stand to gain from the price increase. However, he cautioned that the secondary effect was likely to be damaging. 

“Higher oil prices will increase the cost of production, therefore weakening the competitiveness of our exports. Furthermore, rising oil prices will lower demand from industrial countries like the US, Japan and the European Union,” he told StarBiz. 

The strength of the impact would depend on how long the oil prices remained high, Ariff said, adding that it would take some time before the impact could be seen. 

CIMB Securities head of economics Lee Heng Guie said it could depend on how well trading partners like the United States could withstand the impact of the current price levels. 

He noted that when the oil price was about US$65 a barrel, consumer spending in the United States was still resilient.  

“Note that the current oil prices reflect underlying demand. It is demand-driven and not a supply shock. But, of course, we should expect some impact on consumption growth,” he said. 

Both the economists noted that there might be another round of petrol price hikes if crude oil remained at current levels, or higher. 

Ariff said the Government at some point would not be able to absorb the price increases, especially when it was planning to cut the budget deficit. In comparison, he said, petrol was still cheaper here than in Thailand, Indonesia and Singapore. 

Ariff also said higher fuel prices would drive up the cost of energy and transport, leading to an increase in production expenses. “It will be cost-push inflation in the system,” he said, noting that inflation rates were likely to move ahead of interest rates. 

Last week, Bank Negara estimated that inflation would remain above 3% till April next year and a major factor cited for the high rate was rising crude oil prices that pushed up operating costs and the cost of imported materials. 

Ariff said any increase in interest rates in the present environment might soften consumer spending. To spur domestic growth, steps have to be taken to lower inflation. 

He said, for instance, the ringgit might be allowed to appreciate as this would help reduce the cost of imports, hence making goods cheaper for consumers. 

Lee of CIMB Securities said growth in the second half was expected to be slightly better than in the first.  

“Export momentum is still there and domestic demand remains strong. Although private consumption slipped in the second quarter, it is still growing,” he said. 

He noted that government spending in the first half had been low but was expected to pick up in the second half.  

In addition, the services sector, which has been supporting the economy, is expected to show decent growth in the second half, Lee said, adding that he was maintaining his gross domestic product (GDP) growth estimate at 5% for the year. 

Ariff said Mier maintained its GDP forecast at 5.1%. 

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