Bright spots amidst the dark clouds

by **Cals** Mon 21 Dec 2015, 00:36

Saturday, 19 December 2015
Bright spots amidst the dark clouds
BY M. SHANMUGAM

MINISTER in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar finally broached a subject that was very obvious to many, but one that key decision-makers tended to shy away from.
Yes – we are talking about the falling price of oil and how it is going to impact the coffers of the Government.
Abdul Wahid says that if oil prices continue to remain at current levels, the budget for next year has to be revised because it was based on Brent crude at US$48 per barrel.
The price now is at US$37 per barrel and is likely to fall further before consolidating. The new norm for oil prices is likely to be below US$40 per barrel for Brent crude and it could stay this way for some time.
Next year, the world will get supplies from Iran that is joining the international market after having been left out due to sanctions for years.
The United States is also poised to jump on the supplier bandwagon, as Congress this week agreed to lift a 40-year ban that prohibits the export of oil and gas.
So, supply will be ample and demand is not likely to pick up.
Oil and the economic fortunes of Malaysia are so intertwined to the extent that it affects both large businesses and the man on the street alike. Ordinary Malaysians are already feeling the effects of the reduced contribution from oil to the coffers of the Federal Government.
At the Umno General Assembly, there was a debate on the rising cost of living, a topic that was particularly brought up by the Youth and Wanita wings of the dominant political party in the country.

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Maintain toll rates: Khairy is pressing PLUS Expressways Bhd not to raise the toll rates next year.
With his background in economics and a short stint as an investment banker at ECM Libra, Youth Leader Khairy Jamaluddin would know the dynamics of oil and how it affects the economy and the people.
He is pressing PLUS Expressways Bhd to not raise toll rates next year.
But the question is: Can the Government afford to compensate PLUS if toll rates are not allowed to be raised?
The shareholders of PLUS are UEM Group Bhd, which is owned by Khazanah Nasional Bhd, and the Employees Provident Fund (EPF). While UEM on the grounds of it being owned by the Government can afford a freeze on toll hikes, the same cannot be said of the EPF.
The EPF has a duty to its contributors, who are mostly wage earners, and has to see that it gets a return on its investments.
The wage earners - already having to cope with the rising cost of living - cannot be deprived of their returns on savings in the pension fund.
When oil prices were high, the Government could afford to compensate companies such as PLUS to avoid toll hikes. But now, its hands are tied.
Nevertheless, it will be interesting to see how this issue is resolved.
Another factor that could push up the rising cost of living is a potential hike in interest rates.
After nine years, the Federal Reserve raised the range of the funds rate to 0.25% to 0.5% from the earlier range of 0% to 0.25% on Wednesday.
It was an event that the global capital markets awaited for the whole year to end the distortions that was happening to the economy because of the cheap money policy.
Since 2008, the US has embarked on an easy monetary policy to beef up the economy and save its banking system from collapsing. Interest rates were at 0% or near that level – a new phenomenon for the financial markets.
But savers were penalised for keeping money in the bank. The rest of the world, particularly the emerging markets, saw an increase in asset prices from houses to equities because the money was flowing out of the US looking for places to invest with higher yields.
The price of oil went higher due to the weak US dollar and growing demand in China, benefiting exporters such as Malaysia and Brazil.
Bank Negara was able to maintain a low interest rate environment, keeping the overnight policy rate (OPR) at 3.25%.
But with the lift-off in interest rates in the US, how long more can Bank Negara keep the OPR at 3.25%?
If the OPR moves, it will set off a chain reaction that will see the base lending rates of banks also increase, a move that would inevitably bring about a higher cost of repayment for mortgages – adding to the cost of living.
But not all is doom and gloom for 2016.
The cheaper ringgit has brought about higher exports. In October this year, exports grew at 16% compared to last year, helped by the weak ringgit. The products were mainly electrical and electronic products.
Another positive is that some sectors of the economy that were over-heating and could potentially impact the country for a long time if allowed to fester, have started to cool down.
For instance, the oil and gas sector where valuations were lofty to the point that they no longer made commercial sense, is seeing more realistic values emerging in assets such as vessels and oil fields.
Property is another area that is seeing a slowdown. Prices are coming down to more realistic levels and rentals have fallen off their highs, especially in the city centre. There is still some room for prices to come down further.
But the brightest spark that is taking place is the trend of heightened scrutiny on Government agencies that allow for a raise in rates for services provided to the public. Towards this end, agencies such as the Land Public Transport Commission, Express Rail Link and PLUS are under scrutiny. Government departments are also complaining that their budgets have been cut.
The pressure this time around is coming from within. Bodies such as Umno Youth are aligned to the Government, so there is real reason for it to act.
Hopefully, this will lead to the long overdue reforms in how public finances are handled. There have been some reforms but it has not happened at the speed it could have taken place.
One area where reforms are badly needed is in the number of concession agreements that the Government goes into.
There are even concession agreements for cleaning services of Government complexes.
Why is there a need for concession agreements for such basic services when it should rightfully be tendered out to the lowest bidder every year?
Hopefully, the tough balancing act that the Government will have to perform amidst the falling oil price will force the expediency of reforms.