Economic growth will slacken in Malaysia at the end of the year, continuing into 2015 as revenues from oil and other commodities plummet, but structural reforms will help mitigate these effects as well as lower debt.
Despite expectations of a weaker fourth quarter due to reductions in oil earnings and slower demand for commodities such as palm oil, GDP growth in 2014 is likely to exceed the 4.7% achieved in 2013, thanks to a 5.6% growth rate recorded in Q3 and even bigger advances in the first two quarters.
Like many oil producing nations, Malaysia’s economy has been hit by nose-diving global energy prices. At the end of November, state-owned oil major Petronas said its contributions to government coffers next year could be 37% lower on the 2014 total of RM68bn ($19.6bn) if oil traded in the $70-75 band. However, with Brent crude prices hovering just above five-year lows of $54 in mid December, the loss in revenues may be a lot more significant.
There is likely to be further pressure from cooling demand for oil products and electrical goods. The combination of diminishing exports and a 9% rise in imports in October saw Malaysia’s trade surplus narrow to RM1.2bn ($344m), the lowest since April 2013.
With sharp drops in palm oil and rubber prices this year also hurting trade figures, the government waived the levy on oil shipments for the last four months of the year in a move analysts expect will continue into 2015 to help melt stockpiles and boost demand. The government also announced a fund to support rubber producers, set to take effect in January, if prices continue to fall.
Lower fuel subsidies
The pressure from falling oil prices will be somewhat offset by reductions in fuel subsidies the government introduced in December, as well as the lower cost of imported fuels and related products. In recent years, Malaysia has shielded its citizens from the impact of surging crude oil prices with fuel subsidies. But this measure has exacerbated the budget deficit, one of the region's biggest as a proportion of GDP.
The government is expected to save up to RM20bn ($5.9bn) a year from scaling back the subsidies, and with Malaysia’s imports of crude oil and petroleum derivatives valued at up to RM26bn ($7.5bn), there will be further savings for the economy from the sharp fall in crude prices. However, many analysts say the 40% drop in oil prices so far this year will more than wipe out the effect of the subsidy cut.
Lower oil prices might also mean the government misses its target to reduce the fiscal deficit down to 3% of GDP next year from 3.5% of GDP forecast for 2014, due to the projection being made on the assumption of oil prices at $105 per barrel.
The government’s ongoing fiscal consolidation is part of efforts to improve Malaysia's financial health, with measures including spreading taxes more evenly across the population and lowering government debt. A new 6% tax on goods and services tax (GST) will come into effect on April 1, replacing several other consumption taxes but also covering a wider range of products and services. Analysts are predicting a dip in local spending when the tax begins, which could further dent growth in 2015.
During 2014, the Malaysian economy retained a strong appeal for overseas investors. FDI inflows totalled RM52.5bn ($15bn) in the first three quarters, a 30.5% increase year-on-year, according to the International Trade and Industry Ministry. The nine-month figure has already exceeded the 2013 year total of RM45bn ($13bn), while investments in the services, primary and manufacturing sectors, taking into account both foreign and domestic sources, reached RM172.3bn ($49.6bn), a 9.1% increase.
Analysts are predicting a slowing of the rate of expansion for the Malaysian economy in 2015, but with forecasts at around 5%, it is still well above the global average and in line with growth recorded in 2013. A stabilising of oil prices and even a modest rebound in the international economy would boost export demand, fuelling stronger growth in the second half.
However, closer to home, Malaysia is still reeling from the two tragedies that hit its aviation and tourism industries this year. The disappearance of Malaysian Airlines MH370 in mysterious circumstances in March and the shooting down of MH17 over Ukraine four months later with a combined death toll of 537 pushed the airline close to bankruptcy.
The airline’s majority shareholder, the state investment fund Khazanah Nasional, has now begun preparations to privatise the loss-making national carrier after it received approval from minority shareholders in November.