KUALA LUMPUR : Falling oil and gas prices are a double whammy for Malaysia’s economy as the Muhyiddin Yassin administration wrestles with the fallout from the Covid-19 pandemic.
Unemployment hit a three-decade high of 5 per cent in April. The country recorded a trade deficit in the same month for the first time since the 1997 Asian Financial Crisis, with mining exports (largely made up of crude oil and natural gas) suffering the steepest plunge at 31.5 per cent, far more than the 23.8 per cent overall.
In the past, the government relied on the deep coffers of state oil firm Petronas – the country’s only Fortune 500 entry – to bail it out of tight spots either with cash injections or to finance megadeals.
But demand for petroleum products are in the doldrums as a result of lockdowns around the world as countries grapple with the pandemic. Supply exceeded demand in April, resulting in West Texas Intermediate crude (the US benchmark) hitting negative prices for the first time in history – people were paying to get rid of oil that they could not store.
Brent crude fell dramatically to a 21-year low to below US$16 a barrel in April, and price estimates for the year now hover just above half the projection of US$62 in the latest budget.
Not only is petroleum-related government revenue set to plunge from 2019’s RM81.2 billion (S$26.5 billion) or nearly a third of the Treasury’s takings, but Petronas is also slashing spending which will reduce the pie for 4,000 service providers in the oil and gas sector that accounts for 13 per cent of the economy.
“We anticipate a very challenging outlook for the rest of 2020… Industry players, including Petronas, will be adversely impacted if the current market situation persists and oil prices remain low,” former chief executive Wan Zulkiflee Wan Ariffin said last month when he announced that first-quarter profits had fallen by more than two-thirds to RM4.5 billion.
Tan Sri Muhyiddin came to power on March 1 after a week-long political crisis, and his Cabinet was formed on March 10, just eight days before strict movement and border controls were imposed to curb the outbreak that shut most of the economy.
Having reduced average new Covid-19 infections to double digits in the past two months, Malaysia embarked on a recovery phase on June 10, with most activities, aside from mass gatherings, contact sports and entertainment venues, allowed with precautionary measures.
But the modest 0.7 per cent GDP growth in the first quarter, which was only slightly impacted by the shutdown, portends a recession for the year. The Asian Development Bank said last Thursday that it expected Malaysia’s economy to shrink by 4 per cent, while Barclays a day earlier forecast a whopping 8.5 per cent drop.
Although Kuala Lumpur has launched four stimulus packages to prop up the economy, much of the RM295 billion announced comes from loan moratoriums, cheap credit, allowing workers to draw down on their own retirement savings and discounts on utilities funded by the private sector.
The Treasury is coughing up just RM45 billion – aside from about RM8 billion in tax exemptions and deferrals – which Finance Minister Zafrul Aziz says will not push the fiscal deficit past 6 per cent of GDP. This pales in comparison to neighbouring Indonesia’s $67 billion stimulus package (6.3 per cent deficit) and Singapore’s $92.9 billion (15.4 per cent).
Analysts and officials who spoke to The Straits Times said the government would draw down from bodies, such as the civil service pension manager, the sovereign wealth fund Khazanah, and cash out on the telco spectrum – a sudden award last month was rescinded after uproar over the lack of an open tender.
Unlike Singapore, though, Malaysia does not have deep government reserves to draw from, and will need to rejig Budget 2020 allocations and even designate the RM19 billion wage subsidy as development expenditure to keep from busting spending limits.
The central bank has increased its dividend to RM3.5 billion from RM2 billion last year and Petronas is expected to part with proceeds from stake sales in listed subsidiaries last year.
Petronas is already straining under the weight of various obligations such as the regular RM24 billion in annual dividend it has promised, which could exceed the oil giant’s profit for the year.
The company has so far resisted talk of a special dividend this year, having shelled out RM30 billion extra in 2019 to cover a shortfall in tax refunds which the then Pakatan Harapan government claimed was hidden by its Barisan Nasional predecessor.
“Any additional dividends will need to take into account our ability to fund our on-going operations, service debts and other obligations as well as invest in future growth,” it told Reuters in April.
The deal brokered for Petronas to surrender up to RM2.8 billion in sales tax to Sarawak – a state controlled by a crucial Muhyiddin ally – is understood to be the straw that broke the camel’s back, leading Tan Sri Wan Zulkiflee to walk out the door this month.
Petronas allocated RM50 billion this year for capital expenditure – with up to RM28 billion for the domestic market – but has said it would slash this by more than a fifth. Operating costs that usually total more than RM20 billion would be cut by 12 per cent.
Already, only 40 per cent of the country’s 4,000 registered vendors are active, in part due to the oil price crash in which Brent crude sank to US$30 per barrel in 2016 from US$110 just two years earlier. Industry associations have pressured Petronas to rescue the sector from collapse, even floating the idea that the state giant buys out ailing players.
By : Shannon Teoh – THE STRAITS TIMES