SINGAPORE – Oil prices will likely spiral to US$31 (S$42.02) per barrel by the end of the first quarter due to rising global oil inventories, according to Bank of America Merrill Lynch. This will be a mixed blessing for Southeast Asia. While most countries, including Indonesia, the Philippines and Thailand, will benefit from cheaper oil, it is a different story for oil-exporting Malaysia.
Chua Hak Bin, head of emerging Asian economies at Merrill Lynch Singapore, told the Nikkei Asian Review that alternative energy sources, such as shale gas, and lower demand due to a slowing Chinese economy were factors behind the lower oil prices. He said oil is unlikely to rebound to the US$100 range. The shale gas revolution has changed the energy market and “it has become even more competitive and responsive,” he said.
Chua observed that Malaysia has been hit particularly hard due to its heavy dependence on oil exports. About one-third of total government revenue comes from oil-related activities, such as those of national oil company Petroliam Nasional, better known as Petronas. As this revenue is sensitive to changes in oil prices, Chua said Malaysia’s fiscal deficit may worsen as crude prices languish. “Petronas was this vehicle with plenty of funds that was always ready to fund the fiscal deficit. And there is a risk [now that] the situation is gone.”
Chua added that Malaysia’s fiscal deficit is 55 % of its gross domestic product, the highest in Southeast Asia. According to the International Monetary Fund, Malaysia’s current-account surplus shrank from around US$39.4 billion in 2008 to approximately US$14.6 billion in 2014. For its 2015 budget, the Malaysian government announced Jan. 20 that it will cut 2 % from the 273.9 billion ringgit (US$75.9 billion) originally planned.
Investor confidence in Malaysia has also been affected by low oil prices. “People [have] lost confidence and that has shown up in the foreign reserves of Malaysia,” Chua said. When investors exit a country’s bond market, it leads to foreign capital outflows.