Managing the downside risk of low oil prices is crucial for Malaysia, says World Bank
(The Star) – FALLING crude oil prices have roiled markets worldwide, stirring a lot of noise about the outlook for the future, in particular, of oil-producing countries like Russia and Venezuela, and even, Malaysia.
While the debate continues to rage about the direction of crude oil prices and whether the rout is going to end anytime soon, experts will tell you that predicting oil prices is a notoriously difficult challenge.
“It is very difficult to project oil prices; there are a combination of real (structural) effects and speculative activities driving the direction of the prices of the commodity,” Ulrich Zachau, World Bank’s country director for South-East Asia, explains to StarBizWeek in a recent interview.
Without trying to pinpoint the bottom of the crude-oil slump, Zachau, who was in town over the week to launch the latest edition of the World Bank’s Malaysia Economic Monitor entitled Towards a Middle-Class Society, says he does not expect to see global crude oil prices to stabilise in the near term.
“Oil prices are highly volatile … we expect continued volatility, with wide swings between high and low oil prices,” he argues.
Downside risk
Global crude oil has lost nearly half of its value since June on sluggish global demand amid rising supply, driven by US shale output and the unwillingness of the Organisation of the Petroleum Exporting Countries (Opec) to cut production.
Having shed about 49%, crude oil prices are currently trading below the critical US$60-per-barrel level. Global benchmark Brent, for instance, was traded at US$59.30 per barrel, while the US WTI benchmark was quoted at US$54.32 per barrel at press time yesterday.
For Malaysia, says Zachau, managing the downside risk emanating from the decline in global crude oil prices has become the single most important challenge now in its attempt to grow the country’s economy.
“It is an external risk … it is not within Malaysia’s control,” Zachau says.
“But it is likely to be the most important challenge that the country is going to face next year,” he points out.
While he notes that World Bank expects global crude oil prices to recover from the current low levels next year, he says there is still the possibility that oil prices will stay low longer or even fall further in the medium term.
“The important thing is to be prepared for different type of contingencies,” he says.
World Bank has recently cut its 2015 growth forecast for Malaysia’s economy to 4.7% from an earlier estimate of 4.9% on expectations of slower export growth and investments in the oil and gas industry as well as moderate private consumption next year. The bank expects the country’s gross domestic product (GDP) to expand 5.7% in 2014.
It notes that Malaysia’s export-dependent economy is susceptible to the uneven recovery in advanced economies and slower growth in China, while tighter monetary policy and liquidity conditions abroad are also likely to impact the country. However, as evidenced by the recent depreciation of the ringgit, the key risk is further and sustained declines in oil prices, which would put pressure on Malaysia’s external and fiscal accounts, the bank stresses.
Dismissing World Bank’s 2015 GDP growth target for Malaysia as simply “too conservative”, Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar maintains that the Government’s projection of 5%-6% GDP growth next year is still an achievable target.
Wahid concedes, nevertheless, that the outcome might come in at the lower end of the official target range, given the uncertainties surrounding the global economy.
According to Wahid, Malaysia is in a better position to weather the challenges of declining oil prices compared with other oil-producing countries, as Malaysia has a well-diversified economic base and it has in recent years taken steps to reduce the country’s reliance on oil revenues.
Petroleum-related revenues account for around 30% total Government revenue each year.
On the direction of the global crude oil prices, Wahid says it is not the Government’s job to speculate but its job is to remain focus on managing the country’s economy well.
“Short-term fluctuations will not affect the medium and long-term prospects of Malaysia,” he says.
Wahid points out that Malaysia’s economy is now better able to withstand global shocks, having learnt valuable lessons from the 1997/1998 Asian financial crisis, and further tested again by the 2008/2009 global ginancial crisis.
“We have done all we can to strengthen our economy and financial system,” he says. “Malaysia has what it takes to deal with the fluctuations in the economy.”
