Malaysia's market reacted quickly to the news Monday, with the yield 10-year government bond rising to 3.92 percent Monday, the highest since September, from around 3.8 percent Friday, according to Reuters data. Bond yields move inversely to prices.
On Monday, the KLCI shed around 2.3 percent, although it recovered slightly Tuesday, ending up 0.4 percent; it's down around 4 percent so far this year. The U.S. dollar was fetching around 3.43 ringgit late Tuesday, with the Malaysian currency around 2.7 percent weaker compared with 3.34 ringgit against the greenback on Thursday, before the Petronas announcement. At the end of June, when global oil prices peaked, the greenback was fetching around 3.20 ringgit.
From around $115 a barrel, Brent crude has lost around a third of its price. Weak demand, a strong U.S. dollar and booming U.S. oil production are the three main reasons behind the fall, according to the International Energy Agency (IEA).
Credit Suisse estimates every 10 percent decline in oil prices could cut Malaysia's GDP growth by around 0.2 percentage point. If oil prices stay around $70 a barrel, the country's economic growth could come in around 4.4 percent, compared with consensus forecasts around 5.2 percent, the bank said in a note Tuesday.
It cut its forecast for the ringgit, expecting the U.S. dollar will fetch 3.49 ringgit in three months and 3.53 ringgit in 12 months, from 3.38 ringgit and 3.42 ringgit respectively. But it estimates the U.S. dollar would need to fetch more than 3.60 ringgit to offset oil's disinflationary impact on the economy.
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But it isn't entirely clear how badly the lower oil-related payments will hurt government finances after the government abolished its fuel subsidies this week.
The subsidies accounted for 9.3 percent of total budget expenditure in 2013, compared with just 2.6 for education and 0.7 percent for health, Su Sian Lim, an economist at HSBC, noted in a report before the Petronas announcement.
While praising the government's quick and decisive move, she also noted that it was politically expedient as oil prices had fallen so far that the subsidized price was actually higher than the market price.
"The significance that this fiscal reform holds for Malaysia's longer-term economic prospects cannot be overestimated," she said, citing estimates it would save the government as much as 20 billion ringgit annually.
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In addition, Malaysia also receives some benefits from the lower oil prices as it is a small net importer, Citigroup noted in a report Tuesday.
"Fiscal reforms and Malaysia's small net oil imports provide a significant cushion to the risk from lower oil prices," it said.
The ringgit has fallen sharply against the U.S. dollar on the perception it has "the most to lose" from crude's decline, but that has made Malaysia's exports more competitive against regional peers as well as cushioning exporters' profit margins when profits are repatriated, it said.
Other commodities a worry
Indeed, Citigroup is more worried about the impact of declines in other commodity prices, particularly declines in crude palm oil (CPO) prices. That's not much comfort, however, as CPO tends to be correlated with oil prices, particularly as it's often used for bio-diesel production.