Falling oil prices and plunging ringgit: Government must step up to the plate

18 JANUARY 2015
PRESS STATEMENT
FOR IMMEDIATE RELEASE

Falling oil prices and plunging ringgit: Government must step up to the plate

On December 12 last year, I told the people to brace for tougher times ahead because we

were facing a double whammy with declining international crude oil prices coupled with a

depreciation of the Ringgit at levels unseen since the Asian Financial crisis of 1997.

The prices of Brent crude oil have continued to drop. To date, it has plunged by 53% from

last year, that is, from an average of USD 108 per barrel in January 2014 to an average of

USD 51 for January 2015.

Our Ringgit is currently the weakest Asian currency, leaving aside the Yen. It has depreciated

to 3.55 Ringgit per USD from 3.32 Ringgit a year ago. Since October 2014, the ringgit has

lost almost 8.3%.

It is true that other Asian currencies have also fallen against the USD but our drop is almost

double that of the closest laggards such as the Taiwanese dollar and the Singapore dollar at

4.59% and 4.50% against the USD respectively.

Crude palm oil prices have also weakened by approximately 10% to RM 2300 per tonne.

Impact on our revenue

Income from oil and gas makes up 30% of our total government revenue. The 2015 Federal

Budget that was tabled on October 10 last year was based on an oil price range of USD 100

to 105 per barrel.

Even before the plunge to the current levels, Petronas had warned that if crude prices

averaged at USD 70 to 75, its overall contribution to government revenue would fall short of

8%. This means a shortfall of RM 19.4bn of the estimated revenue of RM 242bn against the

2015 budget projection.

Now that the oil prices have dropped by nearly half, what will be the actual impact on our

revenue?

Granted there will be savings in fuel subsidies but, as Maybank Research in its latest

publication says, a revenue shortfall of RM 8.4bn will already outweigh the subsidy saving

and result in a fiscal deficit of 4% of GDP instead of the 3% target for 2015.

According to Goldman Sachs and Morgan Stanley, crude prices may continue to hover

between the USD 40 and 50 range in 2015. What this means is that the impact on government

revenue and deficit will be even greater. Some analysts are warning of deficit levels reaching

as high as 5%. This would be further accentuated if the ringgit continues to weaken and CPO

prices continue to fall.

In terms of equity investment, according to CLSA (Credit Lyonnais Securities Asia),

Malaysia is the worst performing Asian market in 2014. While the stock exchanges in

Indonesia, Thailand and Singapore still managed to chart positive growth, our Bursa suffered

significant declines.

Apart from the factors already stated earlier, there is also the issue of foreign capital

outflows, exiting both Ringgit bonds (owning 45% of total MGS) and equity. With

weakening carry trade attraction and fiscal uncertainties these have driven the Ringgit to

historical lows and pushed MGS yields up and raised financing cost (debt to GDP at 55%).

What the government must do now

First and foremost, corruption and leakages must be tackled. We have already shown in the

Pakatan Rakyat 2015 shadow budget that a conservative saving of only 15% in government

spending leakages could save almost RM20bn or an equivalent of 1.6% of the projected

GDP.

Secondly, we must put a stop to the culture of wastage and opulent and spendthrift ways

cloaked under shady procurement processes and opaque privatisation awards. The

government must stop sweeping bad debts under the off-balance sheet carpet.

There are no alternatives to good governance other than being transparent and truthful with

information relating to the country’s finances. In this regard, we are already saddled with the

scandalous 1MDB. The people will not tolerate yet another one.

Thirdly, a bi-partisan ‘National Crisis Committee’ should be set up without further delay

comprising government and opposition MPs, economists, market experts and other

specialists.

Inter alia, the committee should be tasked with the responsibility of monitoring commodity

prices on a daily basis and given the authority to execute any necessary measures to mitigate

any negative impacts once a consensus is obtained.

Fourthly, the government should be prepared to introduce austerity measures in the event that

oil prices go lower and remain there. This will mean cut-backs on mega projects while

continuing to spend on critical areas such as healthcare, education and the humanitarian

assistance for flood victims.

It should be noted that other oil dependent countries such as Norway (with very good

governance) are already on ‘alert mode’ running scenarios on the long-term effects of low oil

prices.

It is true that the movement of international commodity prices is beyond our control. But

surely we have control over how we spend our money and manage our overall finances.

This is where the government is failing and continues to fail in spite of our repeated calls to

do a reality check and put in place remedial measures. What have they been doing all this

while? Is this the kind of attitude to show case our drive for transformation?

Flood crisis and lessons drawn

It is the same attitude that had resulted in the devastation caused by the recent floods.

Flooding is an annual phenomenon going on for centuries but no serious mitigation measures

were done by the government.

In this regard, we must commend the NGOs who came in droves to help out. Comprising all

the races and religious groups this show of support and readiness to help the victims is

unprecedented and underscores the paramount importance for the Federal government to

work with Pakatan state governments and the NGOs.

Message to the rakyat

Tougher times lie ahead as government spending could be reduced and growth slows down.

The rakyat needs to remain frugal and not take on additional unnecessary debts.

As inflation continues to rise while wages remain stagnant, the rakyat will face greater

economic hardship and income inequality will continue to widen.

Meanwhile, we want the government to come clean on the economic outlook for the nation.

The people await the Tuesday announcement and expect serious and earnest efforts put in for

the restructuring of the 2015 budget.

ANWAR IBRAHIM