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Home»News»World News»Malaysia Takes Action As Oil Prices Bite
World News

Malaysia Takes Action As Oil Prices Bite

By orientalnewsngJanuary 20, 2015No Comments4 Mins Read
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Yemisi Izuora/Agency Report
Malysian PM Najib Razak Malaysian PM Najib Razak
Malaysia’s government has announced its decision to slash spending in 2015 by some $1.5 billion.

This will translate to about 2 per cent of its proposed outlays,in a move to stem anticipated economic challenges arising from lower crude-oil prices.

Some producers with huge foreign reserves like Saudi Arabia have been able to maintain expansionary budgets, even as they weather a decline in oil prices below $US50 per barrel.

But governments with less firepower like Russia, Venezuela and Nigeria have been forced to reduce budgets and take other measures.

While Russia recently announced a 10 per cent cut across most sectors of its budget, Nigeria late last year restricted foreign-currency trading to stem capital outflows.

“Malaysia would be somewhere in the middle,” said Rahul Bajoria, a Singapore-based economist at Barclays. While the country relies on oil and gas for about a third of its total budget revenues, the country has been able to manage its revenues and expenses without a budget blowout, he said.

Still, the measures announced Tuesday by Prime Minister Najib Razak amount to a significant belt tightening for Malaysia, Asia’s biggest oil exporter and the world’s second-largest natural gas exporter after Qatar.

The government will cut a net 5.5 billion ringgit, or $US1.5 billion, from expenditures, largely by slashing grants to state-linked companies and overseas travel by government officials, as well as suspending mandatory military service program for a year. Costs for subsidizing fuel also fell sharply.

The budget signals that Malaysian authorities are prioritizing stability in government finances over growth. Mr Najib said the economy will likely expand by between 4.5 per cent and 5.5 per cent this year, down from an earlier projection of up to 6 per cent. The government raised its fiscal deficit target to 3.2 per cent of gross domestic product from 3.0 per cent.

“We are neither in a recession nor crisis as experienced in 1997 and 2009, which warranted stimulus packages,” Mr Najib said in an address broadcast live on television.

The revision assumes an average oil price of $US55 a barrel for 2015 compared with $US100 a barrel when Mr Najib presented the 2015 budget in October, a conservative estimate which could leave the government room to increase spending on infrastructure if oil recovers.

The US dollar has risen about 12 per cent against the ringgit in the past six months, making the Malaysian currency one of the worst performers in Asia. Many other countries in the region, including China and Japan, are oil importers that benefit from a fall in the cost of crude. The ringgit slipped about 0.8 per cent on Tuesday after Mr Najib’s announcement, hitting a six-year low.

The decline has sparked talk in the market that Malaysia may be pondering capital controls, a replay of action it took during the 1997-98 Asian financial crisis. But Malaysian authorities have been quick to scotch such rumors, and have allowed the currency to decline.

Deutsche Bank points out the depreciation makes Malaysia’s exports more competitive in the global market place. Mr Najib said the government is confident increased global demand for manufactured goods such as electronics — which make up about one-third of total exports — will help offset the decline in commodity receipts.

Still, oil and gas accounts for more than a fifth of total exports, and continued low crude prices, added to weak demand in China, a major trading partner, are likely to continue to weigh on overall exports, the bank said.

The country’s trade surplus already is narrowing, and any further move in this direction could put more pressure on the ringgit. That could spell trouble for companies that have large overseas debt. Malaysia’s total external liabilities stood at 70 per cent of GDP at the end of September, and companies already are spending less on investment as servicing costs in dollar terms climb higher.

Some economists think the central bank will react to the situation by reversing last year’s interest rate increase. Others think the bank will stand pat, while Deutsche Bank believes a further rate rise is possible to ensure more capital doesn’t flow out of the country and to support the ringgit.

Central Bank Governor Zeti Akhtar Aziz said last Thursday the central bank’s monetary policy is already “highly accommodative.” The central bank last raised the overnight policy rate by 0.25 percentage points in July and has held the benchmark rate steady at 3.25 per cent since then.

 

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