The global price of crude oil has seen some sharp plunges over the past week in what appears to be the start of an ongoing price war between Saudi Arabia and Russia. While this chain of events will most definitely result in lower fuel prices for Malaysians, it could also affect Malaysia’s fiscal capacity and thus prompt revisions to the nation’s Budget 2020.
MIDF Research said in a note that the fuel price for RON95 could drop to as low as RM1.32/litre, based on the assumption that the price of Brent crude oil falls to USD$35 per barrel. However, this can pose a problem to the Malaysian government given that Budget 2020 was drawn up based on the oil prices of USD$62 per barrel – an issue that can lead to a revision of the national Budget.
“[The] plunge in global oil price will suppress Malaysia’s fiscal capacity given that [the] previous Budget 2020 is based on the assumption of USD$62/bbl,” said MIDF. “The newly formed government will likely revise the Budget 2020 and we may see a reduction in government expenditure and investment.”
The research house added that it is expecting Malaysia’s GDP growth to be “under pressure” in 2020.
The Edge Markets previously reported that the Malaysian government gains RM300 million for every US dollar increase in crude oil price. The assumption now drawn is that Malaysia loses the same amount with every US dollar drop in oil prices. Last year, lower oil and gas prices resulted in slower mining and quarrying sector contributions, which partly contributed to Malaysia’s GDP growth slowing year-on-year to 4.3% from 4.7% in the fourth quarter.
This latest oil price war began after Russia refused to support supply cuts recommended by OPEC in talks held last week, with the price of Brent oil falling by 8.9% to close at USD$45.54 last Friday. Over the weekend, Saudi Arabia slashed its export prices in apparent retaliation, plunging the global oil price down further to USD$31 per barrel.
While there is a chance that Saudi Arabia’s decision could be short-lived, experts have predicted that any failure to result in Saudi Arabia scaling back its reactions could result in prices falling to the 2016-low of USD$26/bbl.
Last Friday, the fuel prices for the second week of March in Malaysia for RON97, RON95, and diesel dropped to RM2.19/litre (-21 sen), RM1.89/litre (-19 sen), and RM1.96/litre (-17 sen) respectively. While the everyday Malaysian can rejoice over the lower fuel prices, it does seem that the experts have decided that the slump in oil prices – especially if prolonged – is unlikely to do the country’s economy any favours.
(Source: The Edge Markets)