KUALA LUMPUR, March 10 –The disintegration of the Organisation of the Petroleum Exporting Countries (OPEC) and its alliance members (OPEC+) has caused the oil market to crash with prices dipping by more than 30 per cent on Monday – the most since the 1991 Gulf War.
This has set off a price war between two oil-producing giants, namely Saudi Arabia and Russia. The cataclysmic collapse dragged the benchmark stock market index, FTSE Bursa Malaysia KLCI, to close broadly lower on Monday by 58.94 points or 3.97 per cent to 1,424.16 from Friday’s close of 1,483.10. More than RM70 billion (US$1=RM4.23) was wiped out from Bursa Malaysia due to the oil crash as well as the spread of COVID-19 outside China with more than 90 countries being affected by the outbreak. As of March 9, the Health Ministry confirmed 18 new positive cases of COVID-19, bringing the tally to 117 in the country.
While some argue that the stock market is not a reflection of the economy, one cannot not brush off the lingering effects of the “double trouble” (COVID-19 and weak oil prices) to the nation’s growth.
Malaysia is still largely dependent on oil price and production for its fiscal balance. Petroleum income is made up of an estimated 20 per cent of the country’s total revenue and every US$10 fall in oil price cuts the government revenue by some RM7 billion.
Kenanga Research noted that Budget 2020 deficit could widen to 4.3 per cent from 3.4 per cent in 2019 should Brent crude average at US$40 per barrel this year.
The oil war added a downside factor on crude oil prices and a plunge in global oil would suppress Malaysia’s fiscal capacity given that the Budget 2020 is based on the assumption of US$62 per barrel.
Brent crude price has recovered slightly since Monday to US$36.84 per barrel at mid-afternoon today.
The COVID-19 outbreak affects negatively the demand side while the oil war is putting pressure on the supply side.
Inheriting the country in a tough economic climate, all eyes are now on Prime Minister Tan Sri Muhyiddin Yassin in the first 100 days as this period is crucial for the new premier in prioritising the right initiatives that would help him steer the country in the right direction.
His extensive experience will come in handy as he sets out to fulfil his responsibilities as the eighth prime minister of Malaysia and give assurance to the people that he would make the right decisions.
Muhyiddin served as Parliamentary Secretary to the Foreign Affairs Ministry and was Deputy Federal Territories Minister and Deputy Trade and Industry Minister between 1981 and 1986, before his appointment as Johor Menteri Besar after winning the Bukit Serampang state seat in the seventh general election in 1986.
With Muhyiddin at the helm until 1996, Johor saw rapid progress and it rose to become one of the nation’s most developed states.
Asia School of Business assistant professor of business and society Dr Renato Lima de Oliveira said Malaysia is still dependent on oil price and production for its fiscal balance.
“Policymakers will face a big challenge with the combination of slowing economy due to COVID-19, low oil prices reducing Petronas’ revenues, and the demand for a stimulus package to counter the effects of the global economic slowdown.
“Less revenue from economic activities (taxes) and oil (Petronas), while at the same time there is more pressure to increase spending,” he told Bernama.
In February, Petronas said it will pay RM24 billion in dividend to the government this year and there was no plan for a special dividend payment to the government in 2020.
In 2019, Petronas paid a total of RM54 billion in dividends to the government, comprising RM24 billion in normal dividend and RM30 billion in special dividend.
Meanwhile, there are uncertainties in the disputes between Petronas and Sarawak over oil taxation, which can further reduce the amount of revenue from oil production to the federal government.
Earlier this month, Sarawak Chief Minister Datuk Patinggi Abang Johari Tun Openg had said that the state government has left it to the federal government to decide whether to continue the previous government’s plan to table the amendment to the Article 1(2) of the Federal Constitution regarding the status of Sabah and Sarawak.
Another big challenge facing the new administration is to strengthen race relations, which have worsened since the 14th General Election, as well as establishing political legitimacy through the parliamentary process.
Pundits expect the continuation of the Malay agenda to remain on the list of the new government that consists of majority Malay-Muslim representatives.
“(It will be) more or less the same but much more emphasis on Malay agenda items. A lot more programmes and money for the benefit of Malay community,” University of Tasmania’s director of the Asia Institute Prof Dr James Chin told Bernama.
Meanwhile, de Oliveira said Budget 2020 would likely be recalibrated because of the new government, adding to the current economic storm.
Oil Business
de Oliveira opined that the oil price this year will be a political decision between OPEC members.
“Will they plead with Saudi Arabia to reduce production and boost prices a bit, perhaps to at least make it back to the US$50-US$60 per barrel level? Or will they fail to reach an agreement, in which case everyone will sell to their maximum capacity, driving prices down, without a clear anchor?” he asked. de Oliveira noted that what happened over the last weekend was that Saudi Arabia got tired of trying to sustain production cuts alone, without the help of another major producer like Russia, and decided to open the spigot.
Continuation of National Anti-Corruption Plan
On Monday, Muhyiddin announced a much-anticipated cabinet line-up. In breaking with tradition, he appointed four senior ministers in lieu of a Deputy Prime Minister.
The senior ministers are Datuk Seri Mohamed Azmin Ali (International Trade and Industry Minister), Datuk Seri Ismail Sabri Yaakob (Defence Minister), Datuk Seri Fadillah Yusof (Works Minister) and Dr Mohd Radzi Md Jidin (Education Minister). Muhyiddin promised Cabinet members of calibre, who have integrity and a clean track record. All eyes will now be on when or whether the new Cabinet members will declare their assets under the National Anti-Corruption Plan that was launched last year. Under this plan, all Members of Parliament, including those in the opposition, are required to declare their assets to the Malaysian Anti-Corruption Commission.
Besides the RM20 billion COVID-19 linked economic stimulus package, Malaysians and investors can look forward to the initiatives and action plans that the new government has in store for implementation to steer the country’s economy safely out of the current uncertainties.
— BERNAMA
