Zeti: Current oil price favourable to economy

KUALA LUMPUR: The current global crude oil price is favourable to the country, as it brings down costs to businesses and consumers, said Bank Negara Malaysia (BNM) Governor Tan Sri Dr Zeti Akhtar Aziz (pix).
Global oil prices have continued their downward spiral following the Organisation of Petroleum Exporting Countries' (Opec) decision to not cut oil production. Brent crude oil fell more than US$2 a barrel to a five-year low below US$68 (RM233) in London yesterday morning. It hit a low of US$67.53 a barrel, the lowest since October 2009, and was down US$1.42 at US$68.73 a barrel by 0921 GMT, Reuters reported.
"At current levels, it is a plus to growth and inflation. There will be less pressure on inflationary forces and therefore it is to the benefit because consumers will have more funds for discretionary expenditure. The increase in discretionary expenditure and consumption demand will spur growth and therefore we (the region) are able to remain on a sustainable growth path," Zeti told the Asean Business Club Corporate Networking Lunch here yesterday.
However, she cautioned that if crude oil prices dropped beyond a "certain threshold level", government revenue and government development expenditure are going to be affected and investment in innovation and exploration in the petroleum sector will be cut back.
Bank of America Merrill Lynch Asean economist Chua Hak Bin, however, was not so positive, saying that the government is likely to miss its 3% fiscal deficit target next year despite the scrapping of fuel subsidies that took effect yesterday. It expects the fiscal deficit to come in at about 3.8% of gross domestic product (GDP) in 2015, widening from 3.5% this year.
"Our earlier calculations estimated a 0.5% of GDP hit to government revenues from a 10% fall in global oil prices. Global oil prices are currently about 30% lower than that assumed in the budget. Brent crude oil could drop below US$60 per barrel over the next six months (the end of Opec), according to our global commodities team," Chua said in a report yesterday.
The impact from the collapse in oil prices on Petroliam Nasional Bhd (Petronas) and other oil and gas operators' bottom lines will hurt investment activities.
Petronas president and group CEO had Tan Sri Shamzul Azhar Abbas has said it will cut capital expenditure by 15% to 20% next year, adding that Petronas will not dish out new risk-sharing contracts unless oil prices climb above US$80 per barrel.
He estimated that if the oil price hovers around US$75 per barrel, payments to the government could be 37% lower next year at RM43 billion, with dividends at RM17 billion, tax at RM17 billion and royalties at RM9 billion.
Meanwhile, RAM Rating Services Bhd said the phasing out of retail fuel subsidies will improve the government's expenditure profile as it will reduce its exposure to volatile global commodity prices.
RAM head of sovereign ratings Esther Lai said the earlier-than-anticipated phasing out of fuel subsidies will help the government achieve its fiscal deficit target of 3% of GDP in 2015 and is a step in the right direction to enhance its fiscal resilience.
"This policy action is timely, given that oil-related fiscal revenues – which account for 31% of total government earnings – are expected to decline."
Concurrently, the policy move reinforces Malaysia's sovereign credit ratings of gA2(pi)/stable and seaAAA(pi)/stable, which is primarily anchored by its relatively strong macroeconomic fundamentals, as it will improve the country's fiscal position.
On the decline of the ringgit, Zeti said that this is temporary and the country's strong underlying fundamentals will kick in to strengthen the currency.
"This (drop in exchange rate) is just a period. Fundamentals will prevail and investments will come back to our region. Any point in time, it reflects developments that are taking place rather than the underlying fundamentals, but in the end, it is the fundamentals that prevail and we should see a better performing currency in our region," she added.