Quora Answer: What is the Impact of Prolonged Sub-US$20 Crude Oil on the Malaysian Economy, Ringgit, & Petronas?

The following is my answer to a Quora question: “What is the impact of prolonged sub-US$20 crude oil on the Malaysian economy, ringgit, and Petronas?”

Malaysia is in a difficult position.  At the beginning of the year, they were projecting a GDP growth if around 3%, meaning that the economy was already slowing down due to several other factors.  The pandemic simply made it worse exponentially.  Malaysia’s economy is now projected to grow at -0.1%, and they will likely fall into a technical recession.  A worst-case scenario, considering a prolonged U-curve, would be an actual recession.

Malaysia’s budget was tabled on the assumption that oil would trade at US$62 per barrel.  Even then, it was rather optimistic.  However, with oil trading at around US$23 or US$24 per barrel at the moment, that budget is in deficit by the billions.  Analysts have calculated the loss at between MYR31 billion to MYR40 billion.  They will likely have to propose another budget for the year, and soon.

The Malaysian government is already heavily constrained, with limited tools to address this.  Their foreign exchange reserves are low, institutional confidence and ratings have not recovered since the 1MDB debacle, and the ringgit will continue to fall against international and regional currencies.  The last stimulus package of MYR20 billion, with an additional MYR620 million, is a stop gap, and definitely not enough for a prolonged lockdown of the economy.  The market thinks so as well, and the local bourse is trading flat, after almost reaching 10-year lows earlier in the month.  This makes borrowing in the international markets very expensive.  Malaysia will likely table a deficit budget, and this will be carried forward next year.  It will be a difficult time for Malaysians.

Specific to the Malaysian government, the Perikatan Nasional needs to prove they are better stewards of the economy than the Pakatan Harapan they replaced.  Otherwise, they will face a reckoning at the ballot box from the rural Malays, who will bear the brunt of this economic malaise.  PAS has its heartland, but BERSATU has no such fallback.  They are still a minor party, with limited support, cobbled together by disaffected Malay nationalists.  The party that has the best chance of gain would likely be UMNO, since they can claim that they alone have presided over a period of sustained growth, and can do that leading a new coalition.

I see no way back for the DAP.  Their ministers have proven to be terrible at building bridges, and spent too much time fighting the civil service, sniping at Singapore, Sarawak and Sabah; and moaning about the poor state of the government.  PKR has an existential crisis, being seen as merely a vehicle for Anwar bin Ibrahim.  The smaller parties have no national consequence.

I foresee the MYR to continue being undervalued compared to regional currencies and the US Dollar, at least until well into 2021.  No one will make major investments until we are convinced that this government has a viable economic recovery plan.  That means next year’s budget will be closely watched.  We must remember that concerns about the economy encompass more than merely the current pandemic.  For example, Malaysia is a major exporter of palm oil.  The European Union is looking to ban imports, and may even write off much of the trade credit.  That is a major source of revenue gone.

Malaysian financial institutions’, and the sovereign credit rating, is still down.  They still have to deal with the consequences of the 1MDB, as mentioned above.  A low credit rating makes the terms of borrowing more expensive and onerous.  For example, Indonesia recently had to issue 50-year bonds.  This constrains how much debt they can take for half a century.  Malaysia might have to do the same.

Petronas will continue to struggle.  We have to remember that even with OPEC and Russia agreeing to cut production by an unprecedented 10%, it only comes into effect in May and June.  It is not immediate.  We are looking at 10 million barrels a day less, when global demand is down 30%.  The projected recovery of oil prices will be slow.  We are looking at US$50 per barrel by the middle of 2021, which is still well below nominal Malaysian budget assumptions.  This loss of revenue will affect production, field development, exploration, and will cascade downline to the thousands of contractors and parasites.  There will be job losses, and pay cuts on a massive scale.  What is likely to happen is that Malaysia will sell stakes in Petronas to raise revenue short term.  I am not sure how attractive that will be when we consider that Malaysia is not a net importer, not exporter.  There will be too much political red tape for it to be attractive.

In summary, things are not looking good, and while seemingly competent, this Malaysian government does not have the mandate to make serious changes.  Paradoxically, going to the polls early before a sustained economic recovery will punish them further, likely leading to a hung parliament.  This will further batter market sentiment, and push the currency value down.