MUHYIDDIN Yassin’s new cabinet will have to confront multiple economic challenges, including the historic slump in oil prices, which may hinder the government’s spending ability, said economists.

They told The Malaysian Insight that besides the slump in oil prices, the slowdown in the global economy because of the ongoing Covid-19 epidemic poses an additional challenge. The disease has infected more than 110,000 people in more than 100 countries, with more than 3,800 deaths.

The new ministers in Prime Minister Muhyiddin’s administration will also have to regain investor confidence to avoid capital flight and sustain their interests.

Sunway University Business School Professor of Economics Dr Yeah Kim Leng said the new government has to cope with the oil price shock as a prolonged period of downturn will affect its ability to increase spending and may necessitate a budget recalibration.

“If the low oil price prevails for six months or longer, a budget recalibration will likely be needed given the significant revenue shortfall,” Yeah told The Malaysian Insight.

“Moreover, the new government has an added impetus to realign the budget according to its spending priorities. This may trigger a mid-term recalibration.”

Budget 2020 was calibrated based on oil at US$62 (RM262) per barrel. Brent Crude closed at US$34.36 per barrel yesterday.

Brent Crude plunged from US$45 a barrel to as low as US$31.02 yesterday, the lowest in almost 30 years.

Oil prices fell after Saudi Arabia opened the spigots yesterday after Russia refused on Friday to join Opec producers to cut output to defend prices.

This has sent anxiety over the markets over a possible price war.

“An all-out price war could result in oil price sinking further, below US$30 a barrel. This could flush out the shale oil exporters from the US.”

“A scenario of US$40-50 a barrel remains the base-case scenario to reflect the weak global demand caused by Covid-19 economic impact,” said Yeah who is also an external member of Bank Negara Malaysia’s monetary policy committee.

Meanwhile, senior fellow at the Malaysian Institute of Economic Research (MIER) Dr Shankaran Nambiar said the plunge in oil price  will affect the country’s fiscal position, which has already been weak in the last couple of years.

Shankaran, however, does not expect a recalibration of the budget although revenue will take a hit.

It is also worth noting that national oil company Petronas has indicated that it will be paying a dividend of RM24 billion for the financial year 2019 to its shareholder, the government of Malaysia.

Another headwind to weather is the weakened consumer sentiment and business confidence, evident since the last quarter, said Shankaran.

“These are difficult times for the Malaysian economy.

“This is exacerbated by the likely drop in global demand, not to mention the sharp dip that China’s economy will take. Over the years, Malaysia has tied itself strongly to economic developments in China.”

The perception on the lack of political stability in the past year and the recent turn of events have also added to investors’ anxiety.

On that note, he said the new cabinet will have to persuade domestic and foreign investors that they have the mandate to govern and are firmly in charge until the next elections.  

“The new cabinet will have to pump up confidence in the economy and demonstrate to foreign investors that Malaysia has clear economic direction.”

Concurring with Shankaran, Yeah said the new line-up will also have to gain public trust and investor confidence to avert capital outflows and sustain both domestic and foreign investors’ interest in the economy.

In addition to dealing with the global economic slowdown from Covid-19 that has hurt exporters and export-oriented industries, Yeah said the government should also mobilise resources and public health education to contain the epidemic from engulfing the country. – March 10, 2020.