Sectors

Slump in oil prices curbs Malaysia’s growth forecast

January 29
4:49 AM 2016

Malaysia has faced a huge setback since the oil prices plummeted. On Thursday, the country revealed a downsized growth forecast for 2016, with slashed spending plans, which seem to have dug a deeper hole for the already-troubled Prime Minister Najib Razak.

As Razak stated, the country suffered the blow mainly because it based its 2016 budget assuming oil prices will remain at an average of $48 a barrel, which has now crashed to $30-35 a barrel. According to Bloomberg, Weiwen Ng, an economist at Australia & New Zealand Banking Group Ltd. in Singapore, said, "It has been a 'crude' awakening for Malaysia. Odds of fiscal slippage remain high with little maneuvering space, especially if oil remains on a significantly lower glide path and tax revenue is crimped by lower corporate profits and weaker growth."

On Thursday, Brent crude, basically the benchmark for oil prices, was trading at $34 a barrel versus last year's $49 a barrel which was already down from $107 a barrel two years ago.

Petronas, the state oil company, still breathes some life into the economy by contributing one-third of total revenue collected by the government, which now loses 300 million ringgit, or $70 million, for every $1 drop in oil prices, as represented by The New York Times.  Razak stated this year, Malaysia's economic growth will be 4-4.5% compared to last year's 4-5. A sharp 20% decrease in ringgit also shook the economy last year, when the prime minister struggled to overcome the scandal regarding huge deposits being made into his personal accounts.

The attorney-general defended Razak, stating that most of the money was a personal donation by a Saudi royal family, which is not really a crime. However, this explanation raised quite a few eyebrows, especially the skeptics'. The attorney-general's decision to clear the prime minister to a review panel was met with an appeal by the country's anti-corruption agency.

However, as far as the ringgit is concerned, Razak said the '4.25 to the dollar' does not reflect its true value accurately, and the national currency is expected to gain momentum once the economy stabilizes. As per abcNews, the government will now shift its focus on increasing household spending by implementing some measures. An employee's contribution towards the provident fund has been reduced by 3% from March-December 2017.

Officials from the Finance Minister said that the revised budget will now see a 5 billion ringgit ($1.2 billion) cut from development expenses and a 4 billion ringgit ($952 million) cut from operating expenses. Additionally, there are plans to provide around 2 million taxpayers a special tax relief. While this may cost the government 350 million ringgit ($83 million), it will save the taxpayers a total of 475 million ringgit ($113 million). Some additional measures to reduce cost of living are creating outlets that offer cheaper agricultural produce, providing cheaper home rates for first-time buyers, and training retrenched workers.

Despite such measures, a survey showed that the country's household confidence hit an all-time low in respect of financial outlook for 2016. Inflation is expected to reach 2.5-3.5% which does not match the forecast figures of 2-3%. As ANZ stated, "The actual delta to the economy depends how much is being spent by households as compared to being saved as precautionary savings in such dire economic environment."

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