LAST_UPDATEFri, 22 Jun 2018 11pm

Malaysia's Current Account And Growth Are Positively Correlated With Oil Prices: SC

KUALA LUMPUR: Malaysia has benefitted from higher oil prices through higher commodity exports, higher fiscal revenue and higher commodity-related investments according to a report by Standard Chartered Research.

Further, Malaysia's current account and growth are positively correlated with oil prices, the research firm said in report titled 'Quantifying the Impact of an Oil Shock'.

The report also analyse studies of whether a demand or supply driver is behind a major oil price move.

For Malaysia, higher oil prices are positive for government revenue.

Government estimates suggest that every USD$1 per barrel increase in oil prices adds about RM300 million to revenue.

That said, oil revenue is only budgeted at 14.8 per cent of revenue for 2018 compared with the peak in 2009 when it constituted some 43 per cent of total fiscal revenue, noting that there may be some upside as the government assumes an oil price of USD$52 per barrel for 2018.

"Hence, we estimate that for every 10 per cent rise in global oil prices, Malaysia’s current account increases by about 0.3 percentage points of gross domestic product (GDP) after four quarters," it added.

Malaysia is a large exporter of liquefied natural gas (LNG) and palm oil.

Given the positive correlation between oil and other energy commodity prices, higher oil prices typically support LNG and palm oil prices, the report noted.

The research firm also said in 2017, Malaysia’s LNG and palm oil exports amounted to RM80 billion.

The removal of a blanket oil price subsidy in late 2014 added to the positive fiscal impact of oil prices.

At their peak in 2012, government subsidies were equivalent to about RM25 billion, reducing the positive fiscal effect of high oil prices previously, it said.

The managed float system also means that global oil price variations pass through more quickly than before.

"Our analysis suggests that every 10 per cent increase in global oil prices results in a 0.5 ppt increase in headline inflation four quarters later," it added.

On the global front, oil prices have continued their strong run that began towards the end of 2017 as the market’s mindset and core assumptions have changed significantly over the last year.

The report further said the supply-demand balance for oil in 2018 appears supportive of higher prices.

In terms of oil balances, demand is running ahead of supply, there is no prompt surplus and inventories have fallen sharply.

"We expect oil demand growth to outpace non-OPEC (Organisation of the Petroleum Exporting Countries) supply growth in 2018, although higher absolute prices may cause some temporary demand reduction," Standard Chartered noted.

"The long low-oil-price cycle, which led to three lost years of investment in many conventional long-cycle oil plays, is drawing to a close, although we forecast that non-OPEC supply outside North America will extend its 2017 fall, due to the lagged effect of this lost investment," it said further.