Global Economic Turmoil Reaching Malaysia

OCT 25 - The global economic turmoil is at Malaysia’s doorstep.
And the first severe challenge facing the government is its ability to collect revenue and push growth – a fact being drive home by the slump in crude oil and palm oil prices.

The price of crude oil is hovering around US$62 per barrel, a mere US$2 per barrel above Petronas production costs. If the price of crude drops further and reaches US$50 per barrel, Malaysia’s oil giant and the country will be in a lose-lose situation.

A sensitivity analysis by Aseambankers showed that a US$1 per barrel drop in crude oil prices will result in the Government losing RM600 million in petroleum-related income over a year. Some 40 per cent of the country’s
revenue is derived from the oil and gas sector.

The Malaysian Insider understands that the government is also watching with great concern the freefall in the palm oil price. The price is slightly under RM1,400 per tonne, while the cost of production is between RM1,200 and RM1,700.

Big players like Sime Darby, IOI and United Plantations are already feeling the pinch though their cost of production is among the lowest in the country.

If the CPO price hits RM1,200 per tonne as expected, then the earning capability of all the plantation companies will be affected significantly as will their contribution to the country’s economy. The situation is already dire for many of the small and medium planters, with their cost of production between RM1,300 and RM1,700.

The government is hoping to collect RM60 billion from the oil palm industry this year. The drop in commodity and oil prices is presenting the government with a dire situation.

For example, during the 1998 Asian financial crisis, the rural population was not adversely affected, but instead benefited from the weakened ringgit that increased their commodity exports revenue.

The Malaysian Palm Oil Board estimates that almost a quarter of the country’s oil palm-planted area is smallholdings, either as part of government schemes or owned by independent smallholders. The Federal Land Development Authority (Felda) alone has some 113,000 settlers in oil palm and rubber schemes. Smallholders have lower yields and higher cost of production.

So, unlike 1998, Malaysians will have to brace themselves for much slower growth, unemployment and real pain – both in the urban centres and rural areas.

This time around, no enclave will be spared from the economic tsunami that is about to lash Malaysia