Negative impact of Malaysia's falling oil and commodity prices less than feared

Focus less on commodities as growth indicator.

It has been noted that commodities may not be as important to Malaysia’s economy as feared.

According to a research note from Standard Chartered, when oil prices collapsed in 2015, markets were concerned about a potential collapse in Malaysia’s trade balance.

However, Malaysia is actually a slight net importer of oil products – it exported MYR 56bn of crude and petroleum products in 10M-2015, while it imported MYR 60bn.

Lower oil prices have had the positive effect of lowering the oil import bill.

Falling natural gas and palm oil prices do have a negative impact on Malaysia’s exports, however. In 10M-2015, exports of liquefied natural gas and palm oil (both crude and processed) fell 25% y/y to MYR 43bn and 4.3% y/y to MYR 58bn, respectively.

Commodities constituted about 30% of Malaysia’s total exports in 2014, before prices collapsed. While this is high, this may not be as high as feared. Falling oil prices have also raised concerns about Malaysia’s fiscal position.

Here's more from Standard Chartered:

However, Malaysia’s 2015 fiscal deficit was raised only slightly to 3.2% of GDP from the initially budgeted 3.0%, despite the sharp oil-price decline. This was partly thanks to subsidy savings (fuel subsidies have been eliminated), and partly because dividends from the national oil company are determined by the government and are set based on the previous year’s oil prices.

Looking at the labour-market impact, less than 1% of Malaysia’s labour force works in the mining and quarrying industry. Including agriculture, forestry and fishing, the percentage rises to 13% (Q2-2015 data). While this is not small, it does not suggest that the commodity sector is a major direct employer. The collapse in oil prices also raised concerns that investment would fall significantly.

However, investments in mining and quarrying accounted for only about 12% of the total net capital stock in 2014; the bulk of investments in Malaysia are in manufacturing. Our GDP tracker for Malaysia uses industrial production, the leading index and loan growth.

Growth in these indicators has moderated recently, highlighting downside risks to Malaysia’s growth in 2016. The slowdown in industrial production was driven mainly by manufacturing and electricity. At the same time, production is stronger in export-oriented industries than in domestically oriented ones; this reflects the slowdown in the domestic economy and currency weakness, which supports export growth at the margins.