Low oil prices, weak ringgit can hurt economy, says Dr M

Falling oil prices and a weakening ringgit can hurt the Malaysian economy, says a former prime minister, who disputes Putrajaya’s argument that the economy can withstand falling commodity prices. – The Malaysian Insider file pic, December 26, 2014.

Tun Dr Mahathir Mohamed has warned that falling oil prices and a weakening ringgit can hurt the Malaysian economy, refuting Putrajaya’s attempts to calm such fears in the past few weeks.

The former prime minister, who survived two economic crises in his time in office, became the latest critic of the Najib administration’s efforts to down play the effects of falling commodity prices and its effects on the world economy.

“Simply assuming that we are immune to the massive and widespread decline in the prices of almost all the raw materials and goods we produce for consumption and export does not reflect the depth of our understanding of the problems we face.

“We are a trading nation and changes affecting the world market must affect us one way or another,” he said in the latest post at his popular blog chedet.cc.

Dr Mahathir's latest criticism also comes after a meeting with Datuk Seri Najib Razak on Saturday to discuss his concerns over strategic investor 1Malaysia Development Bhd (1MDB), which has delayed loan repayments despite having a cash pile kept in the Cayman Islands.

Members of the Cabinet have in past few weeks sought to assure Malaysians that the current trend in oil prices and the ringgit’s value would have little impact on the country’s economy.

At least 30% of the government’s revenue comes from oil.

On December 2, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said the government would still achieve its fiscal deficit target of 3.5% of gross domestic product this year.

Husni was also confident that the government would also be able to reduce the fiscal deficit to 3% next year even with low oil prices.

On December 17, Minister in the Prime Minister’s Department Datuk Abdul Wahid Omar said the country could still achieve economic growth of 5% to 6% next year even with low oil prices.

Dr Mahathir has challenged those arguments saying Budget 2015 was presented when the price of oil was US$110 (RM385) per barrel.

“Not only has the oil price tumbled from US$110 per barrel to less than US$60, but palm oil price, rubber price, share prices and the exchange rate of the ringgit have all taken a severe beating.

“All these things involve us, Malaysian, our commodities and our money. But we are assured and reassured that we would not be affected. We will continue to grow at the projected rate.

“Are we!!?” Dr Mahathir said.

He also argued that any gains from lower oil prices, such as the reduced cost to transport goods and people would be offset by reduced earnings by national oil company Petronas.

This would, in turn, affect how much dividends Petronas paid the government.

“We are a small producer of oil, said to be 650,000 barrels a day. We are also a great consumer of oil since our use of motor vehicles is the highest in Asean in terms of per capita ownership. “(Government and corporations) cannot be lulled by the gains from lower cost of oil alone. Loss of income and higher costs of imports must be taken into account.

“It would not be too far wrong to assume that any gain from lower oil price will be negated by lowered earnings from Petronas oil and gas.”

He said the depreciation of the ringgit would also raise the cost of importing raw materials, thereby raising production costs for Malaysian businesses.

“There may be a demand for wage increases and revision of rates as the ringgit devalues. Inflation will be the result.

“For the general public, there must be a lowering of the purchasing power of their incomes when acquiring imported goods or when abroad.”

- TMI