Petronas’ role in the larger economy

The govt may look to national oil company again for funds to support the country’s growth


PETROLIAM Nasional Bhd (Petronas) is set to announce its second-quarter (2Q) financial results soon. The performance of Malaysia’s most profitable company will be watched eagerly by the market and its sole shareholder — the government.

As the state-owned energy company is the nerve centre of the country’s oil and gas sector, Petronas’ financial performance is critical to the wider economy. It is after all the most successful company based on revenues, profits and other financials. It is also celebrating its 45th birthday this year.

Indicators suggest Petronas’ listed downstream businesses would influence its overall profit, despite the average global oil price not tumbling to the dismal levels of January 2016.

Its upstream business, which accounts for about 55% of the group’s revenue, had been averaging at US$65 (RM273) a barrel level for the Brent contract from April to June this year, compared to above US$70 in the corresponding period last year.

But the weaker ringgit could cushion any possible fall.

Petronas’ level of profitability this year will remain important to the government as political pressures, spiralling debts and growth headwinds would see the government hard-pressed to sustain the country’s economic growth.

Despite an average economic growth of above 4.5% in the first half of the year (1H19), a sizeable portion of the population feels pressured by the high cost of living. It has been the main headwind for the Pakatan Harapan government.

Finance Minister Lim Guan Eng has indicated Budget 2020 will be an expansionary budget without any new taxes.

So, although Malaysia’s diversified economy will keep growing into 2020 according to economists, Putrajaya would expect big companies like Petronas to continue spending as the world succumbs to the wrath of US President Donald Trump’s tweets.

The national oil company is a major revenue source to federal coffers. It is contributing some RM54 billion in dividends, including a special dividend of RM30 billion, this year to help Putrajaya plug the RM37 billion outstanding Goods and Services Tax and income tax claims hole.

According to recent official figures, the government has paid RM17.1 billion of the refund claims with RM16 billion received from the RM30 billion special dividend promised by Petronas as at end- April this year.

The dividend is on top of the RM20 billion the government collected in petroleum tax last year and RM70 billion in corporate tax, some of that would have come from Petronas and its subsidiaries and companies.

For the wider economy and energy sector, the money the national oil company spends annually is only second to the federal budget.

Petronas has budgeted a capital expenditure of RM50 billion for the year, up slightly from the RM46.8 billion it spent in 2018, with RM30 billion of the amount earmarked for upstream projects based on an average price US$66 per barrel of crude.

For its part, the government has resorted to issuing yen-denominated Samurai bonds as a cheap way to raise funds using the Japanese government backing — much like a company would raise funds with the help of a credit enhancement agency.

It also recently sold some assets in Singapore and agreed to restart infrastructure projects with revised terms and values.

From the monetary policy side, Bank Negara Malaysia has cut its Overnight Policy Rate by a quarter percentage point in May.

But the effects of the lending rate cut would only be felt after a lag period as consumerfocused businesses like AEON warned of challenging business environment in the 2H19.

With international rating agencies keeping a hawkish eye on Malaysia and if revenue falls short of the target, the government may look to Petronas again. While people may criticise the government, Petronas is after all owned by Malaysia — and Malaysians from all walks of life will be the beneficiary.

Bhupinder Singh is the corporate desk editor of The Malaysian Reserve.