‘Sound fiscal measures can soften Covid-19, low oil price impact’

KUALA LUMPUR: Credible fiscal plans and strategies can provide buffers against the impact of the Covid-19 pandemic and oil price war, said Malaysian Rating Corp Bhd (MARC).

Its chief economist Nor Zahidi Alias said this would ensure an optimum fiscal-monetary mix that was consistent with growth as well as the financial stability to weather challenges.

He sees an increased focus on the ringgit as its performance would affect businesses as well as consumer confidence and, in turn, the real economy.

“Historically, the ringgit moves in tandem with oil prices. In general, lower oil prices are associated with a weaker ringgit.

“Nevertheless, history shows that while a sustained weakness in oil prices will dampen ringgit sentiment, a short-term price war is unlikely to have a lasting or significant impact on the currency.

“Again, the key to the future trend of the ringgit will be the duration in which oil prices remain below the historical average,” said Nor Zahidi in a report.

Oil markets tumbled on March 9 after Organisation of the Petroleum Exporting Countries (Opec) and its allies failed to agree on the quantum of production cuts amid the Covid-19 pandemic, as well as on the rolling over of existing cuts.

Nor Zahidi said the economy, which was already facing headwinds following softer global growth and domestic demand, would be affected even more if the downturn in oil prices lasted longer than expected.

“But given that these are the early days in the oil price war, it is difficult to speculate on the ultimate scale of its impact on Malaysia’s economic outlook.”

He said MARC’s rough estimate indicated that Malaysia’s headline growth could moderate by 0.3 percentage point if global economic growth softened to three per cent from 3.3 per cent, as currently projected by the International Monetary Fund.

As oil-related products accounted for about nine per cent of total exports last year, there was a strong likelihood of Malaysia registering a narrower net trade balance and, consequently, a slower gross domestic product growth.

Oil-related income makes up a significant portion of Malaysia’s revenue, averaging 21 per cent during the 2014-2018 period.

MARC expects the government’s revenue target for this year to come under the spotlight if crude oil prices remain below the historical average for a prolonged period.

“Our experience in 2015 shows that a 50 per cent plunge in global oil prices within a year reduced the government’s oil-related revenue by almost 30 per cent. Consequently, total government revenue contracted for two consecutive years.

“Fortunately, revenue from direct taxes had remained resilient, as shown by the amount of corporate taxes that declined by only 2.4 per cent while individuals’ income taxes grew by almost eight per cent in 2015,” he said.