Malaysia is not in danger of duplicating the Greek scenario of banks capping withdrawals even if crude oil price drops to USD10 a barrel, argues lawyer Dato’ Seri Matthew Yeoh
As nightmarish as it may sound, it has happened before once, at the end of the last century. That event was the precursor of a global financial crisis that happened shortly after.
In recent days, oil prices have plummeted to below $30-a-barrel amid warnings the rout could reach as low as $10 and bring down petrol prices to levels last seen in 2009.
Analysts warned the oil market remains fundamentally out of balance as record oversupply and stagnant demand weigh on traders. Improvements in drilling technology, discovery of huge oil fields in the US and most recently, the lifting of sanctions on Iran, have and will contribute to the continuing glut.
There are also the complicated scenarios advanced by many theorists that at play is a huge global chess game by US to weaken the Russian economy, or an intra-OPEC manipulation headed by Saudi Arabia to punish its errant members for breaching the price levels set among members. In fact, OPEC which controls a third of the world’s output has stated that they would not hold an emergency meeting anytime soon to cut production. It is also certain that oil production would not be reduced unless non-OPEC countries, for example Russia, agrees to cut back its output. The paradox for these countries is that faced with their shrinking currency, forex reserves and high sovereign debt, it is necessary in fact to increase production just to keep up with its projected revenue but this strategy is going to lead to further glut.
Whatever the reason is, it appears that the price of oil has gone on a free fall for the moment without the bottom in sight.
Given that no fundamental factors are currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the dollar and equity markets.
Dig deeper; no change
Malaysia is certainly caught in this international gamesmanship, and is likely not prepared in the short term to meet this challenge. It is estimated that oil makes up at least 30% of Malaysia’s total revenue, and as the oil prices have slid downwards over the last year to only 20% of its previous level, Malaysia has lost 26% of its national revenue. This is indeed a grim outlook, so much so that the government has seen the need to revise its national Budget on 28th January, 2016 (at time of print).
However I beg to differ and say that it is not all doom and gloom in Malaysia. Why is this so? Malaysia is in fact a net crude oil importer. Only if we combine crude oil and LNG is Malaysia a net exporter. The price of LNG has not fallen so drastically as crude oil. And as a net importer of crude oil, Malaysia in fact stands to gain from the low crude oil prices.
Of course the global slump in oil prices will affect Malaysia’s total government revenue. The short answer to this scenario is that a shrinking oil and gas sector will negatively impact the overall size of Malaysia’s economy. But the effects will not be felt equally. The brunt of the loss would be absorbed by the oil and gas sector itself. If we are being honest, it’s not the end of the world for them. It just means that years of extra-normal profits return to being more normal.
For the rest of the economy, the negative effect transfer would come muted and delayed. These secondary effects will manifest in things such as lower government spending, and everyone (the economy) generally having less money to spend.
Since our government taxes oil producers, when oil prices are low, government revenues will undoubtedly take a hit. But thankfully, the price drop does not necessarily result in a direct transfer to government revenues.
Firstly, LNG prices while also weaker, have not dropped as drastically as crude oil prices. Secondly, sales of oil and gas products from Malaysia are slightly cushioned by the USD strengthening against the Ringgit.
Additionally, there is further cushioning in the form of expenditure saved by the removal of fuel subsidies. This alone will save the government at least RM21 bil in expenditure, which makes up about a third of our oil revenues.
The country does not equal the government, and the government does not equal the country. Even though government revenues suffer when oil prices are low, as a net oil importer, the balance of trade actually moves in Malaysia’s favour.
Government oil revenues come mainly from taxes and duties on the extraction and sale of oil plus dividends from Petronas. Whether or not the oil is sold within the country or exported, the government stands to make the same amount of money (with the exception of export duties).
But since now Malaysia is a net oil importer, we buy more than we sell. So it makes sense that we as a country (the collective of people and entities that make Malaysia) stand to save more money than the amount we will forego with lower crude oil prices anyway.
From this analysis, a well-managed economy should not give room for any pretense at increasing costs such as materials, labour, transport costs, etc. Real estate prices ought not be compelled by external forces to hike steeply and suddenly.
Although for the immediate future, we are going through some lean times, I do not foresee us going the Greece way with the banks capping withdrawals and such.
Dato’ Seri Matthew Yeoh is managing partner of Yeoh Mazlina & Partners, member of ASEAN Legal Alliance.