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| Brent Crude Oil Falling USD 48.74 on 23rd January 2015 |
Some economists warned that it could negatively impact the country’s current account and have dangerous effects on the economy. Others, however, do not believe that the current account balance is under threat and argued that a weak ringgit would drive up exports and dampen imports.
Such a trade surplus where exports are higher than imports would drive up the current account surplus, said Dr Yeah Kim Leng of the Malaysia University of Science and Technology (MUST).
But Tan Sri Kamal Salih, adjunct professor of Economics and Development studies at Universiti Malaya, said that if oil prices fall below US$40 per barrel it could hurt government revenue and subsequently impact the nation’s current account.
Kamal said a current account deficit would be dangerous given the country’s depleting foreign currency reserves, high debt levels and a weak ringgit.
“We could hit this critical turning point if oil drops below US$40 per barrel which some analysts are predicting it would,” said Kamal.
A Reuters report a day after the revised 2015 Budget was announced on January 20 highlighted fears of the country’s current account running into a deficit.
A current account deficit, the report said, would spook investors in light of the high levels of government, household and capital account debts in the country.
Kamal said in order to prevent this, Putrajaya should consider making a 10% cut to the federal government’s operating expenditure so as to make up for a further drop in oil revenue.
Kamal is the latest expert to urge Putrajaya to make more serious cuts to its operating expenses in order to have enough money to steer the country through a tough economy this year.
Putrajaya had stated during its announcement of a revised 2015 federal budget that it was confident Malaysia’s current account will remain in surplus.
It also announced a cut of RM5.5 billion to the government’s operating expenditure of RM273.9 billion. The government also expected a shortfall in revenue of RM13.8 billion.
Oil revenues make up to 30% of the government’s earnings.
The revised budget numbers were based on the assumption that the price of oil would average around US$55 a barrel throughout 2015.
The same day, oil prices fell to US$48 per barrel. A check on the business website Bloomberg showed that oil was trading at below US$50 per barrel yesterday.
According to financial website Investopedia, a nation’s current account is the difference between its savings and its investment. It is defined as the sum of the balance of trade (goods and services exports minus imports), nett income from abroad and nett current transfers.
The current account is an important indicator of an economy's health, according to Investopedia.
The trade balance is generally the biggest determinant of the current account surplus or deficit.
Dr Yeah said that fears of the current account going into a deficit were “exaggerated”, as Malaysia traditionally exports more goods than it imports.
For instance, in the first half of 2014, higher exports than imports led Malaysia to register a trade surplus of RM63.7 billion
A weak ringgit and stronger dollar would boost exports while local companies would most likely postpone imports, said Yeah who is Dean of MUST’s School of Business.
However, he cautioned that there may be one or two months when imports could be higher than exports and this could drive down the current account surplus.
“For instance, if building materials and machinery for the MRT project all get imported at the same time, it would make it seem that in one month, there were more imports.
“But on average we will see a current account surplus,” Yeah said.
The January 21 Reuter’s report said that the current account surplus narrowed by almost a third to RM7.6 billion between the first and third quarter of 2014, and the prospect of a deficit is looming as oil and gas export earnings fall.
A current account deficit would be the fourth red light blinking on the dashboard of an economy running on debt on all fronts: government, households and the capital account, said the report.
The government has incurred debts of 53% of the Gross Domestic Product (GDP) while Malaysia’s household debts are about 86% of the GDP.
A current account deficit would lead foreign investors, who own 44% of the bond market, to run for the exit, said the Reuters report.
Commenting on the Reuters report, Kamal said it was “a fair warning” of what of could happen to Malaysia this year.
“It’s a warning for us to prepare for what can potentially occur.”
Kamal also suggested that the government lower the Goods and Services Tax rate that will be introduced in April so that Malaysians will have more money to spend.
This would encourage spending which could then be taxed to supplement the government’s income which is falling due to oil prices, he said.
At the same time, a lower GST would help consumers deal with the fact that the prices for goods have not declined even as oil prices dropped.
“Since we cannot control prices we can adjust the amount of disposable income people have,” said Kamal.
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