Falling commodity prices are a challenge for the Malaysia economy, Southeast Asia’s third largest. Some of the country’s major exports such as palm oil, tin, and crude oil are hovering near four-year lows. The Bloomberg Index of 22 raw materials fell to their lowest level since 2009 this week.
Economists have warned of a risk to Malaysian exports – a significant driver of the country’s growth. They totaled over US$230 billion in 2013. Experts noted the impact this could have on Malaysia’s current account. The national budget is already stretched by major infrastructure projects such as the high-speed rail link from Singapore to Kuala Lumpur.
Credit Suisse explains low commodity prices can impact the Malaysian economy in two ways. “First, it reduces the disposable incomes of consumers, especially in the rural areas. 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 estimated crude oil prices to average US$105 a barrel this year.” said the bank in a report. Credit Suisse mentioned that even a 10% fall in oil prices would increase Malaysia’s deficit by 0.1% to 0.3% of GDP.
A Bearish Trend for Malaysia Economy
Brent oil is now quoted at US$79.41. This represents a fall of almost 31% since its highs of US$115.06 earlier this year. The decline is attributed to a slowdown of global economic growth, especially in China. A strong U.S. dollar is further driving down the cost of commodities denominated in it.
Jeffery Gundlach, CEO of US-based fund management firm DoubleLine, believes prices have more room to fall. “I’m convinced that Saudi Arabia wants the price of oil at US$70.”
Other experts say the price of oil will remain weak over the medium if the Organization of the Petroleum Exporting Countries (OPEC) doesn’t cut supply. OPEC is responsible for around 40% of crude oil supply worldwide.
Diversification Needed for Malaysia to Become Developed Country
For its part, the Malaysian economy has diversified a lot over the past few decades. The country’s growth during the 1980s and 1990s was mostly driven by exports, but it’s now a sizable player in the banking and tourism sectors.
Malaysia’s services sector represented 48.1% of GDP in 2013. This number 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. More diversification into the services sector is needed to fix this problem. The future of Malaysia’s economy depends on it.
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