MORE PAIN FOR MALAYSIA: Falling commodity prices will HAMMER economy

KUALA LUMPUR - Malaysia’s role as a key exporter of oil, palm and rubber is set to hit the country’s growth even as neighbouring nations stand to reap benefits of plummeting prices for the three commodities, the Wall Street Journal (WSJ) reported today.

Falling oil prices have particularly hit the country that is dependent on the hydrocarbon sales to fund its annual budget, with its current account surplus dropping to RM7.6 billion in the third quarter versus RM16 billion for the same period a year ago.

While the country cashed in when oil stayed at over US$100 barrel for most of 2013, the sharp decline to under US$80 — with further drops expected — is demonstrating the other side of the equation and prompting foreign investors to withdraw some US$2.5 billion from the country in October.

Malaysia’s oil-related revenue totalled RM63 billion in 2013, accounting for 29.5 per cent of total government income.

“Now the reverse is coming true,” Adeline Ng, head of Asian fixed income at BNP Paribas Investment Partners, was quoted as saying in the WSJ report.

Ng’s firm handles US$636 billion in investments globally, and has reduced its holdings in Malaysia.

Falling oil price is not the only problem for Malaysia, however, as rubber and palm — both of which account for a significant portion of the country’s exports — are also declining to recent lows.

Rubber is down by a fourth in the commodities exchange while palm has slid by 16 per cent this year. Malaysia is the world’s second-largest producer of both rubber and palm oil that are used in various consumer products.

The negative effects for Malaysia are twofold. Exports previously picked up the slack for slower growth in domestic consumer spending as Malaysians begin to sag under an accumulated household debt that is 86 per cent of the economy.

Falling commodity prices will also hit disposable income in rural areas that are dependent on agriculture for their livelihoods, Michael Wan, a Credit Suisse economist, was cited as saying by the WSJ. This in turn will exacerbate the spending growth, and posing a further risk to the economy.

Already the signs are showing. Malaysia’s economy expanded at the slowest rate in the third quarter, growing by 5.6 per cent and falling short of the 6.5 per cent projected in the previous quarter.

The ringgit’s performance against the US dollar also illustrates the effects of the falling commodity prices, with the Malaysian currency the hardest hit among countries in the region after a recent rally by the greenback.

The ringgit dropped by 2 per cent to RM3.35 to the dollar, the lowest it has been in four years. Comparatively, other countries in the region declined by an average of 0.7 per cent versus the dollar.

For Putrajaya, the pressure of falling commodities on the economy will be an added hurdle to its stated goal of turning Malaysia into a high-income country with developed nation status by 2020 — or just five years from now.

To achieve this, it must maintain an annual GDP growth of 6 per cent every year until 2020, but economists are pessimistic Malaysia can maintain the high rate of growth with the looming uncertainties from falling commodity prices, predicting that the economy could expand at less than 4.8 per cent in 2015. -Malay Mail