Malaysia’s economy faces spectre of triple whammy
Petronas president and chief executive Tan Sri Shamsul Azhar Abbas had said on Nov 28 that the national oil corporation was cutting its spending for next year by between 15 and 20 per cent and asserted that its contribution to the federal government’s coffer in the form of taxes, royalties and dividends could be down by 37 per cent to RM43 billion from RM68 billion this year.
Ng Kee Seng, The Ant Daily
Although Bursa Malaysia saw a mild relief with the Kuala Lumpur Composite Index (KLCI) gaining 7.7 points on Dec 2, it was a recovery far from Dec 1’s 42-point slashing.
It was bargaining for oversold counters, namely oil and gas related counters, banks and plantations that helped the 30 key-stock benchmark FBM KLCI close higher.
Analysts had expected a mild rebound following the sell down due to the plunge in oil prices and Petronas’ plan to cut back its spending by 15 to 20 per cent in 2015.
However, according to The Star Online, UOB Kay Hian Malaysia Research is maintaining its overweight recommendation on the Malaysian oil and gas sector with Bumi Armada, Barakah Offshore Petroleum and Deleum as its compelling stocks.
It said crude oil prices, which had fallen to below US$60 (RM205) a barrel from a high of US$100 (RM341) in July, would eventually recover over the medium term. At 5pm yesterday, US crude oil fell two cents to US$68.98 (RM235.8) but Brent rose 25 cents to US$72.79 (RM248.80).
The ringgit was firmer against the US dollar at 3.4260 from the 3.4340 the previous day.
On Dec 1, it was red alert for Malaysia financially and economically as it suffered a triple whammy triggered by falling oil prices and sinking to below US$70 (RM239) per barrel. Even palm oil recorded its biggest daily drop in 16 months to add to the nation’s woes.
However, there was some positive news with crude palm oil for the third month delivery gaining RM29 to RM2,138 on Dec 2.
The technical indicators are all pointing to even lower oil prices.
Technical analysts said the WTI – the benchmark oil price used by Bank Negara to calculate the economic indicators – should find some support at US$64 (RM218.8) per barrel.
If it goes below that level, it could plunge all the way to US$32.40 (RM110) per barrel – the lowest recorded price in recent years when it hit US$32.40 per barrel on Dec 19, 2008, before rising to US$114.83 on May 2, 2011.
Petronas president and chief executive Tan Sri Shamsul Azhar Abbas had said on Nov 28 that the national oil corporation was cutting its spending for next year by between 15 and 20 per cent and asserted that its contribution to the federal government’s coffer in the form of taxes, royalties and dividends could be down by 37 per cent to RM43 billion from RM68 billion this year.
Analysts said the selling could be overdone and expected a relief rebound when oil prices settle.
Falling oil prices, the lowest in five years, are generally due to the production war between Opec and the American oil boom from shale oil producers.
In recent months, the US has become a major producer of shale oil and gas – fuel that’s extracted from rock fragments – threatening the position of Saudi Arabia as the dominant oil-producing country.
In response to the threat, Opec, which is influenced by Saudi Arabia, has vowed to continue production of oil in a market where supply has outstripped demand.
This has led to a free fall in global oil prices that have declined by more than 40 per cent since July.
Late Dec 1 after the opening of the US counters, oil price fell to below US$65 (RM222) a barrel.
Saudi Arabia hopes to break the back of shale oil and gas producers by making their operations not financially viable.
It had been reported earlier that at prices below US$80 a barrel, shale oil producers would go bust.
However, Bloomberg reported that only about four per cent of US shale oil output needs US$80 (RM273) a barrel or more to be economically viable.
The paper wealth wiped out due to the rout on the oil and gas stocks was close to RM8 billion.
The selling pressure also spread to plantation stocks, with crude palm oil for third month delivery down RM63 to RM2,109 per tonne. The fall in crude oil prices would make biodiesel less viable as an alternative at current prices.
UOB Kay Hian Malaysia’s head of research Vincent Khoo said a much lower crude oil price scenario would bring negative implications on the ringgit and the federal government’s ability to spend its way to pump prime the economy.
The head of research, products and alternative investments at Etiqa, Chris Eng, said based on the weakening of the ringgit, foreign funds could be behind the selling.
“However, today’s selling was overdone and I believe there could be a relief rebound,” he said, based on improving US economic growth and ample liquidity from China and Japan.
Eng said according to reports, Bank of America believed Malaysia’s budget deficit could balloon to 3.8 per cent from a planned three per cent while Citi thought the three per cent deficit could still be maintained.
Reuters reported from Jakarta that export data showed weakening global demand for palm oil.
“Everything dropped today (Dec 1) on the back of weak crude oil, poor export figures, weak bean oil and also the weak Dalian – basically everything is weak,” a trader with a foreign commodities brokerage in Kuala Lumpur said.
Generally, the selling at Bursa Malaysia is not over until world oil prices stabilise.
Were the plummeting prices of oil, palm oil and weakening of the ringgit just overreactions? Or is it the beginning of a financial and economic nightmare for Malaysia which is trying to keep afloat to service its tremendously high federal debts of between RM568.9 billion and RM800 billion.
