High Oil Price Will Hurt M’sia As Trade Partners Get Hit

Wednesday April 6, 2011
By TEE LIN SAY
linsay@thestar.com.my


PETALING JAYA: With the price of Nymex crude oil reaching US$108.47 a barrel on Monday, its highest level since September 2008, Malaysia will benefit on a knee-jerk basis.

However, the country will subsequently feel the drag as the growth of its trading partners are affected by high sustained fuel prices.

Analysts said that as a net exporter of crude oil, Malaysia was more insulated compared with its regional peers due to the positive terms of trade in the short run.

They said Malaysia's economic growth could be dampened by second-round effects from higher oil price as its trading partners, who are mostly net importers, reduced their exports as costlier fuel and higher inflation bite into consumer spending.


CIMB Investment Bank head of economic research Lee Heng Guie said the overall net impact on Malaysia would be moderate.

“Based on its major trading partners' vulnerability to high oil prices, high oil prices could shave Malaysia's gross domestic product growth by 0.5 percentage point through both direct and indirect channels,” he said.

On exports, he said, for every US$10 rise in crude oil prices, assuming a constant volume, export earnings were expected to rise by about RM4bil, raising export growth by 0.5% points. Hence, Malaysia would still enjoy a trade surplus.

MIDF Research economist Anthony Dass said that even prior to the unrest in Middle East and North Africa, he had raised his crude oil price projection for 2011 to US$105 per barrel from US$95, compared with US$80 in 2010.

Lending support to his upward adjustment in crude oil price are fear that the Quantitative Easing 2 (QE2) of US$600bil by the United States will dilute the value of US dollar, improving economic outlook from developing Asia, supply constraint and some levels of geo-political risks.

QE2 will see US Federal Reserve buying a substantial volume of long-term Treasury bonds, thereby inducing bondholders to shift their wealth into equities. The resulting rise in equity prices will increase household wealth, providing a boost to consumer spending.

Anthony believes that the world economy has righted itself amid optimism that macro issues have started to turn around.

He said rising commodity prices in the past month did not cause global growth to lose steam. “Thus, we reiterate our 4.3% global growth (projection) for 2011 compared with 4.8% in 2010.”

He also believes that the first-round effect from higher oil price will be positive, raising real GDP by 0.4%.

“But the second-round impact on the economy will be negative. It will slash growth by 0.8%, dragged by weaker external demand with much depending on domestic demand. Hence, the net effect on growth will be a contraction of 0.4%,” said Dass.

Lee said based on an average oil price of US$85 per barrel, Malaysia's oil-related revenue was estimated at RM59.4bil or 35.8% of total revenue this year.

The last time oil prices skyrocketed and threatened to derail the global economy was between August 2007 and July 2008.

At that time, Nymex rose from US$58.32 per barrel on January 2007 to US$145.29 in July 2008.

On a more positive note, oil and gas companies will be the direct beneficiaries of rising crude oil prices.

The uptrend in crude oil prices will encourage more upstream activities by oil majors which will subsequently cascade down to the entire value chain of the oil and gas industry.

Rising crude oil prices will boost jet fuel prices too and, in turn, fuel airlines operating costs.

“Assuming that there's no hedging, every 1% gain in crude oil prices will erode MAS' bottomline by 2% and Air Asia by 6%.

“We believe the tolerance level for jet fuel will hover between US$117 and US$125 a barrel. At US$105, we expect jet fuel to be around US$119 per barrel, falling within the comfortable zone,” said Dass.

http://biz.thestar.com.my/news/story.asp?file=/2011/4/6/business/8420718&sec=business