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 Commodity Index of 22 raw materials fell to their lowest level since 2009.

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.

They noted the impact this could have on Malaysia’s current account. Major infrastructure projects, such as the high-speed rail link from Singapore to Kuala Lumpur, already stretch the national budget.

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 now costs just US$79.41. This represents a fall of almost 31% since its highs of US$115.06 earlier this year.

The decline is because of 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 Develop

For its part, the Malaysia economy diversified a lot over the past few decades. The country’s growth during the 1980s and 1990s was driven mostly by exports. Malaysia is now a sizable player in the banking and tourism sectors as well though.

Malaysia’s services sector represented 48.1% of GDP in 2013. This number increased by a substantial amount, but is lagging behind Singapore’s 73.4%. Its services industry also behind less-developed Thailand, where it 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.

About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's experienced with trading stocks and buying property in Thailand, Cambodia, and elsewhere. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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