Higher oil prices to divide emerging markets, benefit Malaysia

By MARK RAO / Pic By MUHD AMIN NAHARUL

The recent oil price rally could divide emerging markets (EMs) globally, benefitting large net oil exporters, such as Malaysia, at the expense of oil-importing countries.

According to a research report by Nomura Holdings Inc, the macroeconomic cost to large net oil importers, with weak economic fundamentals due to the higher oil prices, could be disproportionately larger than the macroeconomic benefits to net oil exporters.

“A supply-side driven rise in oil prices is more damaging to net oil importers because, in the absence of a strong pick up in exports, the higher import cost of oil would worsen current account positions and compresses profit margins.

“To the extent that companies pass on higher production costs, the economic impact from higher oil prices also raises Consumer Price Index (CPI) inflation,” the report stated.

It added that the economic impact of higher oil prices is felt more keenly in EMs than in developed markets, as the bulk of the world’s major oil producing and consuming countries belongs to the former.

“EM economies are also more energy-intensive and less energy-efficient,” the report read.

Crude oil on the Brent index is currently trading at a three- year and five-month high at above US$74 (RM290.08) per barrel, supported by geopolitical tensions in the Middle East, supply cuts and global demand.

As a large net exporter of oil, Malaysia is also set to benefit in this environment, despite importing a small net amount of crude oil and refined petroleum at 0.2% of gross domestic product (GDP), according to the report.

“Malaysia remains a major exporter of liquefied natural gas (LNG) at 3% of GDP—the price of which is closely linked to oil, but with a few months lag.

“We estimate every US$10 per barrel increase in the price of oil would widen the trade surplus by about 0.4% of GDP, which would help keep the current account in a comfortable surplus (3.6% of GDP as of the fourth quarter of 2017),” the report stated.

Malaysia is currently the third-largest LNG exporter behind Qatar and Australia.

On the inflation front, Nomura is estimating a 0.6 percentage point increase in CPI on every US$10 per barrel rise in oil price, following the decision to remove fuel subsidies in December last year.

“If the current level of oil prices is sustained, fuel prices could rise sharply after the 14th General Election (GE14) and CPI inflation for the year could rise above our 2.5% forecast towards the top-end of Bank Negara Malaysia’s 2% to 3% forecast range,” the report stipulated.

Meanwhile, the Malaysian government has allocated a sizeable oil revenue at 14.8% of 2018’s total budgeted revenue.

Nomura’s report stated that the allocation would provide more fiscal room for the government after GE14 and reduce the need to significantly cut spending in the second half of this year to meet the full-year fiscal deficit target of 2.8% of GDP.

“Overall, higher oil prices would raise upside risks to our GDP growth forecast of 5.5% in 2018 from 5.9% in 2017.

“This, in turn, could provide space for the country’s central bank — which we expect to stay on hold in 2018 — to further normalise monetary policy, raising the risk of another 25 basis points rate hike later this year,” the report added.