Oil plunge puts Malaysia on the defense

Goh Seng Chong | Bloomberg | Getty Images

Malaysia, Asia's largest net oil exporter, revised its economic targets this week to reflect plunging oil prices, but analysts warn the new forecasts may be too naïve as the world braces for an extended oil rout.

Oil-related income accounts for over 30 percent of Malaysia's revenue and with prices of global crude losing over half of their value since June, Prime Minister Najib Razak was forced to make changes to the 2015 budget on Tuesday after basing it on an oil price assumption of $100 back in October.

Among the revisions were a widening of the fiscal deficit target to 3.2 percent of gross domestic product (GDP) from 3 percent, a new oil price forecast of $55 per barrel, a GDP downgrade to 4.5-5.5 percent from 5-6 percent earlier and a budget deficit of 3.9 percent of GDP from 3.5 percent previously.

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"The risk is that the fiscal deterioration may be more pronounced if oil markets turn out to be more bearish than the expected dent in oil revenues," said Cynthia Kalasopatan, market economist at Mizuho Bank, in a note Tuesday.

For example, if oil revenues decline by more than 20 percent from 2014, the fiscal deficit may rise to as much as 3.7 percent of GDP, Kalasopatan explained.

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The International Monetary Fund expects persistent oil price declines throughout this year, Nomura sees prices falling to $30 and Goldman Sachs forecasts Brent around $42 a barrel.

"A protracted oil slump (well below the revised $55 assumption) might cause a huge dent to Malaysia's fiscal consolidation efforts," said Australia New Zealand banking group (ANZ) in a report. "We caution that odds of fiscal slippage remain high with little maneuvering space if oil remains on a significantly lower glide path and tax revenue is crimped by lower corporate profits and weaker growth."

Fitch ratings agency on Tuesday warned that "further measures might be required" for Malaysia to achieve its goal of a balanced budget by 2020, triggering fears of a credit downgrade. The agency currently has a negative outlook on the country, citing dependence on commodities as a key weakness.

Investors quickly expressed their disappointment at Razak's revised budget, sending the Malaysian ringgit to a fresh six-year low against the greenback on Tuesday.

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"It was probably the lack of details and the measured stimulus that may have failed to reassure markets," said Mizuho's Kalasopatan.

Comfort from Petronas

On the bright side, Razak announced that Petronas' dividends will be based on last year's crude prices, easing concerns over a drastic decline in payouts from the state-owned oil giant, analysts say.

The company alone makes up more than half of Malaysia's government revenue and markets were rattled last month after Petronas warned that payments to the government would be 37 percent lower in 2015.

"A steep decline in Petronas' dividends is unlikely," ANZ said, noting that last year's prices averaged around $97 a barrel for Brent crude.