Kelvin Tan said that while Oil and Gas (O&G) was a significant chunk of the Malaysian economy at 17%, the country’s economic base was sufficiently diversified to be able to absorb much of the impact.
Malaysia’s diverse economic structure will help mitigate the effect of falling crude oil prices, said Kelvin Tan, Associate Director of the Oil and Gas National Key Economic Area at PEMANDU.
This comes as the prices of crude oil sank to levels unseen since 2009 – sparking widespread concern that it would damage the country’s economy as petroleum is a significant contributor to both GDP and government coffers.
The price of crude oil dropped below US$50 in the first week of 2015 and some expect it to sink even further to around $40.
Tan said however that while Oil and Gas (O&G) was a significant chunk of the economy at 17%, the country’s economic base was sufficiently diversified to be able to absorb much of the impact.
He also noted that low oil prices could even stimulate demand in the country’s non-oil sectors.
“The short term effect, generally speaking, of low oil prices on government coffers and GDP growth is negative but the impact is slight and not as great as opinion might make it out to be,” said Tan in a presentation at the CIMB Corporate Day in Kuala Lumpur on January 6.
Tan, who started his career as an engineer in the O&G sector in the mid-1990s, said that Malaysia is a “highly diversified economy that happens to be blessed with oil and gas.”
“For any country, diversification prevents extreme disruption,” he said.
Towards being more of a services and industrial economy
Tan said that with the Economic Transformation Programme pushing growth in 12 diverse sectors ranging from tourism, to finance to the electrical and electronics industry, the country was moving towards being more of a services and industrial economy.
“Malaysia is placing a bet on all these diverse areas,” he said.
While the country’s economy is broad-based however, many have been concerned about the government’s dependence on revenues derived from the O&G sector and whether depressed prices could set back its attempts to cut its budget deficit.
Tan, however, pointed out that while about 28% of the government’s budget is indeed coming from O&G, that share has been falling over the years even in recent years of high oil prices. He noted that based on Ministry of Finance data, in 2008, O&G comprised 39% of government revenues. This figure fell to 33% in 2012 and 28% in 2014.
He also noted that the government has “room to manoeuvre” via savings from the rationalisation of fuel subsidies and the upcoming introduction of the Goods and Services Tax (GST) in April which will broaden the government’s revenue base.
Tan said that whether the government budget will have to be revised to take into account any shortfalls from petroleum revenues would likely “depend on how the situation unfolds.”
Tan also said that in the short term, oil prices are a function of economics but in the long term it is a function of geo-politics.
The Economic Transformation Programme is part of Malaysia’s National Transformation Programme. Its goal is to elevate the country to developed-nation status by 2020 by stimulating investment in key economic sectors as well as via the implementation of a raft of strategic policy reforms.
There are 12 ETP focus sectors, known as National Key Economic Areas (NKEAs), which include Palm Oil & Rubber, Business Services, Education, Wholesale and Retail, Healthcare and Greater Kuala Lumpur.
The Malaysian government has been rationalising its fuel subsidies which had previously cost up to RM24 billion a year. It is now considering a more targeted fuel subsidy programme which takes into account individual income.
A 6% GST will also take effect in April this year which is expected to help the government achieve its budget deficit target of 3% of GDP in 2015, down from 3.5% last year.