The falling price of commodities present a challenge for the Malaysian economy, Southeast Asia’s third largest. Some of the country’s major exports, such as palm oil, tin, and crude oil are hovering near their four-year lows and the Bloomberg Index of 22 raw materials fell to their lowest level since 2009 this week

Some economists have warned of a risk to Malaysian exports, which are a significant driver of the country’s growth, and totaled over US$230 billion in 2013. Experts have noted the impact that this could have on the Malaysia’s current account over the medium to long term, which is already stretched by major infrastructure projects and commitments such as the planned high-speed rail link from Singapore to Kuala Lumpur.

Credit Suisse explains that low commodity prices can have an impact on the Malaysian economy in two different ways. “First, it reduces the disposable incomes of consumers, especially in the rural areas, and secondly, it lowers exports and the terms of trade, given Malaysia’s high exposure to a broad range of commodities,”

“The Malaysian government derives about 30% of its annual revenue from the oil and gas sector, mainly through national oil company Petroliam Nasional Bhd (Petronas). It had estimated crude oil prices to average at US$105 a barrel this year.” said the bank in a report. Credit Suisse mentioned that even just a 10% fall in oil prices would increase Malaysia’s deficit by 0.1% to 0.3% of GDP.

 

A Bearish Trend

Brent crude oil was quoted at US$79.41 on Friday – a fall of almost 31% since its highs of US$115.06 earlier this year. The decline is largely attributed to a slowdown of global economic growth, especially in China, along with a stronger U.S. dollar that is further driving down the cost of commodities that are denominated in it.

Jeffery Gundlach, a renowned bond investor and the CEO of US-based fund management company DoubleLine, believes that the price still have more room to fall. “I’m convinced that Saudi Arabia wants the price of oil at US$70,” said Gundlach.

Other experts say the price of oil will remain weak over the medium if the Organization of the Petroleum Exporting Countries (OPEC) does not cut its supply. OPEC is responsible for around 40% of crude oil supply worldwide.

 

Malaysian Diversification

For its part, Malaysia has diversified its economy a lot in the past few decades. While the country’s growth during the 1980s and 1990s was mostly driven by exports, it is now a sizable player in the banking, tourism, and pharmaceutical sectors among others.

Malaysia’s services sector represented 48.1% of GDP in 2013 – a number that has increased by a substantial amount, but is lagging behind Singapore’s 73.4%, and even the less developed Thailand’s services industry which makes up 52.4% of GDP.

As such, Malaysia is highly susceptible to the fluctuation of raw material prices when compared to many of its neighbors in ASEAN. Further diversification into the services sector is needed to not only fix this problem, but to assure the growth of the Malaysian economy well into the future.

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