The penny has finally dropped for Prime Minister Najib Razak, who said on Tuesday he would revamp Budget 2015 - some seven months into a rout for crude oil which has seen the key Malaysian export lose over half of its value.
Up until last month, the Finance Ministry had insisted it would meet a deficit target of 3 per cent of gross domestic product (GDP), despite state oil firm Petronas - which contributes nearly a third of government income - warning that freefalling oil prices meant it would likely remit RM25 billion (S$9.3 billion), or 2.3 per cent of GDP, less this year compared with last year's RM68 billion, or 5.9 per cent of GDP.
Since then, the benchmark Brent has slipped further from US$75 (S$99.25) a barrel to around US$45. The worst flooding in history also displaced a quarter of a million Malaysians and damaged huge swathes of oil palm plantations (national palm oil output was down 22 per cent last month), costing the government RM800 million lion in relief with Datuk Seri Najib promising more to come.
Mr Najib, who is also Finance Minister, showed some awareness of this in his New Year's Day message, downgrading his own 5 to 6 per cent GDP growth forecast for this year to 4.7 per cent, but most economists are not as optimistic.
On the current trajectory, analysts are looking at a "double miss" of targets with fiscal deficit possibly surging past 5 per cent - undoing years of Mr Najib's "fiscal consolidation" - while economic growth projections for the net oil exporter are as low as 4.5 per cent with "downside risks".
"Malaysia needs to wake up to this reality check, but it doesn't seem to have occurred," Bank of America Merrill Lynch economist Chua Hak Bin told The Straits Times before Mr Najib's Tuesday announcement.
The oil price dive is delivering a double whammy - hurting economic activity as well as government revenue. Economists say Malaysia needs to cut spending to make up for a further shortfall in petroleum revenue. Forecasts see Brent prices as possibly touching US$40 before recovering in the second half of the year to between US$58 and US$75.
On the other hand, the government needs to spend to get flood victims back on their feet and make up for the shortfall as oil players cut spending, with some companies having cut staffing. The Finance Ministry on Dec 17 ordered state enterprises to stop buying foreign assets and focus on domestic investment.
With the nation heavily reliant on the oil and gas sector - which accounts for a tenth of the economy even before factoring in supporting services - the worst is yet to come, warns Bank of America Merrill Lynch. Malaysia exports far more gas than oil and the former's price tracks the latter with a six-month lag.
This should not have been the case as Mr Najib's "economic transformation" plan - now in its fifth year - should have had sufficiently diversified and insulated the Malaysian marketplace.
But several measures were delayed due to political struggles - the goods and services tax, first tabled in 2009, was put in place only last April and the government did away with fuel subsidies only last month with the help of plunging oil prices.
For the man in the street, these moves, coupled with a slowing economy, spell trouble, with inflation expected to rise to as high as 5 per cent this year, triple that of 2013. The Malaysian Institute of Economic Research's latest business confidence index saw the sharpest drop since 2008, from 113 in the second quarter of 2014 to 95.9 in the third quarter, while consumer sentiment also soured in expectation of the new consumption tax.
The lack of faith has been reflected in the ringgit's tumble to a five-year low, shedding nearly a tenth of its value against the greenback since the middle of last year to trade at about 3.6 to the dollar. Economists predict the ringgit could fall to as low as 3.7.
The currency's weakening is largely oil-linked, analysts say, which raises the spectre of recession. It sank to 3.73665 a dollar in March 2009, four months after Brent slipped under US$50. The first quarter of 2009 also saw the GDP shrink 6.2 per cent, the first contraction in eight years.
Some say the writing has been on the wall for the current oil squeeze. Industry sources told The Straits Times the "demand price" was between US$60 and US$80, but the government persisted with economic planning based on US$105 in its 2015 Budget presented last October.
Mr Nurhisham Hussein, an economist with Malaysia's Employees Provident Fund, wrote two weeks ago that the nation's net export of oil and gas and reliance on palm oil without mature downstream activity led to "uncomfortably high" exposure to price fluctuations of these primary commodities.
"If Malaysia doesn't... limit its vulnerability to lower commodity prices, it may find 2015 marks the start of a much more difficult economic story."
This article was first published on January 16, 2015.
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