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Oil, gas woes hamper Muhyiddin’s economic recovery plans for Malaysia

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Petronas’ woes mean it may not be able to help bail Malaysia out of its financial tight spots this time. AFP

Oil, gas woes hamper Muhyiddin’s economic recovery plans for Malaysia

Plunging oil and gas prices are set to further hammer Malaysia’s economy, as state oil firm Petroliam Nasional Bhd (Petronas) faces depressed demand due to global coronavirus lockdowns.

Petronas’ woes mean it may not be able to help bail the country out of its financial tight spots this time.

Falling oil and gas prices are a double whammy for Malaysia’s economy as the Muhyiddin Yassin administration wrestles with the fallout from the Covid-19 pandemic.

Unemployment hit a three-decade high of five per cent in April. Malaysia posted a trade deficit in the same month for the first time since the 1997 Asian financial crisis, with mining exports (largely made up of crude oil and natural gas) suffering their steepest plunge at 31.5 per cent, far more than the 23.8 per cent overall.

The Manila-based Asian Development Bank last Thursday said it expected the Malaysian economy to shrink by four per cent, while British multinational financial services company Barclays Plc had, a day earlier, forecast a whopping 8.5 per cent drop.

In the past, the government has relied on the deep coffers of state oil firm Petronas – the country’s only Fortune 500 entry – to bail it out of tight spots either with cash injections or to finance mega deals.

But demand for petroleum products is in the doldrums as a result of global lockdowns over the coronavirus. Supply exceeded demand in April, resulting in West Texas Intermediate crude (the US benchmark) hitting negative prices for the first time – people were paying to get rid of oil that they could not store.

Brent crude plunged to a 21-year low of below $16 per barrel in April, and estimates for the year now hover just above half the projection of $62 in the latest budget.

Not only is petroleum-related government revenue set to plunge from last year’s 81.2 billion ringgit ($19 billion) or nearly a third of the Treasury’s takings, but Petronas is also slashing more than a fifth of capital expenditure, reducing the pie for 1,600 vendors in the oil and gas sector that accounts for 13 per cent of the economy.

“We anticipate a very challenging outlook for the rest of 2020 . . . Industry players, including Petronas, will be adversely impacted if the current market situation persists and oil prices remain low,” former CEO Wan Zulkiee Wan Arin said last month, when he announced that first-quarter profits had fallen by more than two-thirds to 4.5 billion ringgit.

Although Kuala Lumpur has launched four stimulus packages to prop up the economy, much of the 295 billion ringgit announced comes from loan moratoriums, cheap credit, allowing workers to draw down on their own retirement savings and discounts on utilities funded by the private sector.

The Treasury is coughing up just 45 billion ringgit – aside from about eight billion ringgit in tax exemptions and deferrals – which Minister of Finance Tengku Zafrul Aziz said will not push the fiscal deficit past six per cent of gross domestic product (GDP).

This pales in comparison to neighbouring Indonesia’s 677.2 trillion rupiah ($48 billion) stimulus package (6.3 per cent deficit) and Singapore’s S$92.9 billion (US$66.7 billion – 15.4 per cent).

Analysts and officials told The Straits Times that the government would draw down from bodies such as the civil service pension manager, sovereign wealth fund Khazanah and cash out of the telco spectrum – a sudden award last month was rescinded after an uproar over the lack of an open tender.

Malaysia does not have deep government reserves to draw from, and will need to rejig 2020 budget allocations and even designate the 19 billion ringgit wage subsidy as development expenditure to keep from busting spending limits.

The central bank has increased its dividend to 3.5 billion ringgit from two billion last year and Petronas is expected to part with proceeds from stake sales in listed subsidiaries last year.

Petronas is already straining under the weight of various obligations such as the regular 24 billion ringgit in annual dividend it has promised, which could exceed the oil giant’s profit for the year, and the need to dish out contracts to keep petroleum players alive.

The state company has so far resisted talk of a special dividend this year, having shelled out 30 billion ringgit extra last year to cover a shortfall in tax refunds which the then-Pakatan Harapan government claimed was hidden by its Barisan Nasional predecessor.

It told Reuters in April: “Any additional dividends will need to take into account our ability to fund our ongoing operations, service debts and other obligations as well as invest in future growth.”

The deal brokered for Petronas to surrender up to 2.8 billion ringgit in disputed sales tax to Sarawak state – controlled by a crucial Muhyiddin ally – despite the company’s constraints is understood to be the straw that broke the camel’s back, leading Wan Zulkiflee to walk out the door this month.

THE STRAITS TIMES (SINGAPORE)/ASIA NEWS NETWORK

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