Silver lining to economic outlook

by **Cals** Tue 30 Dec 2014, 02:20

Silver lining to economic outlook

KUALA LUMPUR: There could be a silver lining in the Malaysian economy even as low crude oil prices become a concern over their impact on government revenue, hence spending, which is one of the prime movers of local economic growth.
According to economists, as the fuel bills of oil importing countries decrease, demand for manufactured goods will rise. Thus, this could help support the economies of export-dependent nations such as Malaysia.
RHB Research executive director Lim Chee Sing said the low crude oil price situation could be a mitigating factor for global economies from being engulfed in a full-blown crisis, as it is spurred by an excessive supply of the commodity rather than low demand.
“Oil importing countries, such as India and those in North Asia, will have greater spending power when it comes to manufactured products as their fuel bills drop. This will help boost the export-dependent economies, including Malaysia,” he told The Edge Financial Daily when asked to comment.
Lim’s view is similar to that of Datuk Seri Abdul Wahid Omar, minister in the Prime Minister’s Department in charge of economic affairs.
According to Wahid, the diversity of the country’s economy could withstand the impact of the prevailing low crude oil price situation. He also stressed that the government has already diversified its revenue sources, with income from the oil and gas (O&G) industry dropping to 31.2% in 2013 from 35.8% in 2011.
There have been various reports about how low oil prices would have an adverse effect on the Malaysian economy, as contributions from the O&G industry make up a major portion of the federal government’s revenue.
While many economists share the same view as Wahid, a further drop in oil prices could result in the government missing its budget deficit target. Should that happen, there would be weaker confidence in the country’s ratings and as a result the ringgit, which has already seen sharp drops in recent months.
Silver lining aside, Lim expects Malaysia to still register a lower gross domestic product (GDP) growth of about 5% next year, from the expected 5.5% to 6% this year, due to the low crude oil and other commodity prices.
The negative sentiment on the economy is expected to continue into next year, based on the set of worse than expected statistics, said Lim. The fact that the economy will start from a high base next year does not help as well, he said.
“In the first half of this year, we did extremely well as exports rose. However, since then, export growth has been trending downwards and even contracted 3.1% year-on-year (y-o-y) in October because of slowing global demand and low oil prices,” he said.
“On the domestic side, demand is also moderating, as the government is going through fiscal consolidation. Consumer spending is slowing down to 6.4% y-o-y in 3Q14, after peaking at 8% growth y-o-y in 3Q13.”
Malaysia’s overall industrial output growth, as tracked by the Industrial Production Index, eased to 5% y-o-y in October from 5.4% in September.
Nevertheless, AllianceDBS Research chief economist Manokaran Mottain said the dampening sentiment and recent weak data releases indicate a moderation of the pace of growth in the Malaysian economy rather than an outright contraction.
In general, economists are also trying not to paint too grim a picture of the economy next year, arguing that Malaysia will still benefit from the expected increase in demand for non-commodities, such as electrical and electronic products, as well as chemicals and petrochemicals, as the fuel bills of non-oil producing economies come down.
Affin Hwang Capital economist Alan Tan said a projection by the International Monetary Fund shows that GDP growth in advanced economies would increase 0.8% y-o-y if crude oil prices stay low at US$70 per barrel.
He said lower oil prices will benefit advanced economies, and this will translate into demand for manufactured goods. “Stronger external demand will provide support for the Malaysian economy,” said Tan.
Overall, he expects slower GDP growth next year at 5% for Malaysia, after taking into consideration lower oil prices and export growth. “But we believe domestic demand will remain positive. Public investment will also remain steady,” he said.
While low crude oil prices may adversely impact government revenue, the implementation of the goods and services tax and a lower subsidy bill will plug the hole, he said.
Tan’s view is supported by Afzanizam Abdul Rashid, chief economist of Bank Islam Malaysia Bhd ([You must be registered and logged in to see this image.] Financial Dashboard), who says Malaysia is unlikely to post a current account deficit next year. However, the current account surplus would decrease due to imports of capital products to spur future growth.
“This is good as the country is putting its savings to more productive use, which will build its production capacity in the long run. This is reflected in the spending on rail-related projects and highways, and most of them are implemented on a staggered basis,” he said.
Nevertheless, in the event crude oil prices continue to drop next year from the current level of about US$59 per barrel, there is a possibility of a cutback in development expenditure by the government, said Tan.
It is worth noting that under Budget 2015, the government allocated RM2 billion for contingencies. Tan said if there is a need for the government to slash the budget, it is likely that this RM2 billion would be deferred first.
“There is a possibility of a cutback in development expenditure from the RM48.5 billion that has been allocated under Budget 2015. However, development expenditure will still be higher than the RM42.2 billion this year, despite the possible cutback,” he said.
Lim of RHB Research Institute expects the government to take proactive measures to prepare for the possibility of lower than expected GDP growth. Being complacent and just reacting when push comes to shove might be too late, he said.
“It is good for the government to be proactive and have a contingency plan. One of the measures it can take is expediting public infrastructure projects such as the mass rapid transit Line 2,” Lim said.
He said there is no need for the government to “reinvent the wheel” to keep the economy afloat next year. After years of trying to narrow the budget deficit and public debt, the government need not move the goalposts just because economic growth is expected to slow down, he added.

This article first appeared in The Edge Financial Daily, on December 29, 2014.