by Doreenn Leong
THERE were more questions than answers when Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz issued a statement on oil prices on April 21.
He said the finance ministry (MoF) had taken into account the impact of lower oil prices into its budget deficit forecast of more than 4% of the country’s gross domestic product (GDP) this year.
He added that this reflected the whole year’s estimated deficit based on a certain level of oil price assumption.
And if the oil price declines significantly below its annual average estimates, the government will reprioritise expenditures to meet the fall in revenue.
Zafrul’s statement was pretty vague – there wasn’t any figure provided. Was it made just to placate the market? Firstly, what was the level of oil price assumption? Also, what is its annual average estimate for sales and what will be the fall in revenue?
Malaysia is the major net oil exporter among Asean economies and is highly susceptible to price fluctuations in crude oil.
One-fifth of the federal government’s revenue is expected to be derived from oil-related taxes this year and for every US$1 drop in Brent crude oil price, Malaysia is expected to lose RM300 mil in oil-related tax revenue.
Malaysia’s 2020 Budget had assumed an average oil price of US$62 per barrel. Fitch estimated that government revenue could be about 0.4% of gross domestic product (GDP) lower than the budget assumed, should oil prices stabilise at around US$40 a barrel this year.
But crude oil prices have fallen drastically in recent weeks. The international oil benchmark Brent crude fell below US$20 per barrel on April 21 – the lowest since 2002 – following unprecedented negative prices being recorded for West Texas Intermediate crude futures on April 20.
As such, it is only natural that there are growing concerns on the domestic economy as the government’s coffers will be largely affected but MoF’s statement would have done little to ease such intensified worries.
Zafrul also said the ministry will also be looking at structural reforms to ensure better diversification in Malaysia’s economy. So, what are the examples of such reforms which have not been implemented?
Zafrul stressed that it is more important to recognise that Malaysia has a diversified economic base. But, fact is, oil revenue is still a major contributor to the country.
That said, being a major oil exporter, Malaysia can seize the opportunity of low crude oil prices to focus on other industries, such as manufacturing.
Oil exporters can develop high-skilled manufacturing industries, such as aviation and aerospace, road haulage and shipping. Manufacturing and services industries which have substantial energy costs are also beneficiaries from the sharp dive in crude oil prices.
The transport sector, for instance, is a significant winner because petrol is one of its major input costs. Energy intensive heavy manufacturing industries such as cement, steel and metals refining requiring substantial energy power will also be beneficiaries.
Low crude oil prices certainly provide a positive impact in many industries across the region by stimulating consumer spending as a result of lowering inflationary pressures and subsequently boosting economic growth
It is also important for the country to instil investor confidence. By now, the Ministry of International Trade and Industry should come up with proper strategies to attract foreign direct investments and dissuade investors here from closing shop.
Already, British American Tobacco (M) Bhd, which is the country’s biggest cigarette maker, had shut its PJ plant in 2016 citing falling sales as a result of high duties and the growing illegal cigarette trade. The plant closure had seen 230 workers losing their jobs.
With many businesses unable to operate due to the Movement Control Order, they are under immense pressure to survive.
For example, large foreign manufacturers such as Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd are not allowed to operate although it is under the food and beverage segment, which has been classified as essential services.
This can be seen as penalising these operators as other F&B producers can continue their operations.
Heineken, the world’s second-largest brewer, has reported a 14% slide in beer sales in March, with sharp declines in all regions mainly due to closed pubs and restaurants in many countries affected by the Covid-19 pandemic.
In Malaysia, these brewers can’t even continue operations to supply beer to shops, pushing them further into a corner.
Such a move will only deter foreign investors from considering putting their money in Malaysia and may force the existing ones to look at alternative markets which are more investor-friendly.
It is time the government gets its act together by providing relevant data and formulating policies which will draw investors into the country when the pandemic crisis is over. – April 22, 2020
