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InterviewsJune 1 2015

Malaysia's minister of financial affairs sees bright side of oil drop

Drops in oil prices have undeniably affected Malaysia’s economy. But minister of financial affairs Wahid Omar tells Stefania Palma how this was also a blessing to a country that is successfully diversifying its economy and government revenue sources through reforms such as the introduction of a goods and services tax.
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Malaysia's minister of financial affairs sees bright side of oil drop

With a historically large oil and gas sector, Malaysia has had to contain damage from the 50% drop in the global oil price that started in 2014. But senator Wahid Omar, Malaysia's minister of financial affairs, is keen to highlight how the shift in oil prices has in fact been beneficial to key policy reforms, and how Malaysia is successfully diversifying its economy and government revenue sources as part of its economic transformation programme (ETP), which launched in 2010.

Mr Omar expects drops in oil prices to slow down Malaysia's gross domestic product growth, with expectations for 2015 revised downwards from 5.6% to between 4.5% and 5%. But Malaysia’s efforts to diversify its economy away from oil and gas are a reality. “We have always wanted to reduce our dependency on revenues from oil and gas activities. There was a time when more than 40% of our government revenue was coming from this sector. We brought this down to 31% in 2013, and to below 30% in 2014,” says Mr Omar.

Though still a net exporter of natural gas, Malaysia is now a net importer of oil thanks to improved manufacturing exports. Malaysia produces 570,000 barrels of oil per day. Net exports of crude oil total 50,000 barrels per day while the country imports crude oil and petroleum products. “If we take into account petroleum products, Malaysia is now a net importer of crude and petroleum products. Net imports totalled RM1.2bn [$332.2m] from January to November 2014,” says Mr Omar.

In 2014, natural gas exports in Malaysia totalled RM60bn. “We would want to move further downstream. We have embarked on the project in Pengerang [in south-east Malaysia] where apart from processing we also want to import gas and turn Pengerang into a major refinery, petroleum and chemical plant,” says Mr Omar.

Fuelling change

Though the repercussions from the oil price drop are well documented, Malaysia is also benefiting from this price move. Cheaper fuel at the pump will translate into higher disposable income, argues Mr Omar. “We consume 2 billion litres of fuel per day, and with lower prices we have RM400m-worth of savings on average per month, meaning RM15m-worth of savings across households and enterprises per day. Probably two-thirds of that is households, so some RM250m is now in the hands of households every month. This will drive the economy.”

Cheaper fuel has also given the government an ideal opportunity to consolidate its fiscal position and cut excessive fuel subsidies which have been eroding the state budget.

Malaysia’s deficit has been decreasing since the global financial crisis of 2008, when there was a need to pump money in the economy and the deficit was running at 6.7% in 2009. “We knew that was not sustainable. We brought it down to 4.5% in 2012, 3.9% in 2013 and to 3.5% in 2014,” says Mr Omar.

Subsidy rationalisation has now become a priority in this fiscal consolidation. Fuel subsidies ate away 11% of government revenue at their peak in 2013, which is huge, says Mr Omar. But the drop in oil prices in late-2014 made it easier to push fuel subsidy cuts that were already under way. “Fuel subsidies were a blanket subsidy, which benefited both the haves and the have-nots. They actually benefited households with high income the most. Removing them makes you able to implement more income support programmes benefiting low-income households,” says Mr Omar.

Malaysia removed sugar subsidies altogether in 2013. In September that year it also started tackling fuel subsidies, with a RM0.20 cut per litre in September, and another RM0.20 cut the following year.

“As we were implementing subsidy rationalisation, oil prices started to come down. So, in December 2014, we saw the opportunity to remove the subsidy altogether,” says Mr Omar. “We don’t believe in doing everything in one go because it can cause disruptions and distort the market. Reducing it gradually was more palatable and manageable.”

Tax drive

In addition to cutting fuel subsidies and diversifying the economy, Malaysia also implemented the 6% goods and services tax (GST) in April this year to broaden government revenue sources. Mr Omar believes GST’s implementation was long overdue, with 160 countries already having implemented a form of VAT.

At a press conference in Kuala Lumpur in late February, Mr Omar stated: “This will be a shared responsibility. Let’s stop politicising GST and let’s get on with it.”

Though met with varying levels of resistance at public and political level, Mr Omar says the GST could be key to broadening Malaysia’s tax base. “We have been relying on revenue from income taxes, both from corporates and individuals. We need to improve collection and minimise leakages. Only 2 million Malaysians actually pay income tax. That is a really narrow base considering we have a population of 30 million. By moving into GST, we will broaden our tax base,” he says.

If businesses wish to claim back input tax – which is the GST charged on the purchase of goods and services used in the business activity – then they will need to file official documentation, meaning GST could also indirectly minimise tax evasion.

Though increasing Malaysia’s tax base, the GST and the subsidy cuts are translating into upward inflationary pressures. But the drop in oil prices is counteracting this trend. Fourth-quarter inflation in Malaysia in 2014 dropped to 2.8% from 3%. In January 2015, it dropped further to 2.1%.

“Because of lower oil prices, the average inflation for 2015 will be muted even with the implementation of GST. We expect an addition of 1.08% after the GST but we do not expect the consumer price index to be more than 4% in total for 2015,” says Mr Omar. Malaysia’s target is to keep inflation at less than 4%.

Asean opportunity

As the 2015 chair for the Association of South-east Asian Nations (Asean), the community’s economic integration is another priority for Malaysia. Many analysts have expressed doubts about the Asean Economic Community’s (AEC) ability to consolidate given that it includes countries at vastly different stages of development. But, to Mr Omar, this is an advantage.

“As a community you are better off when you have diversity. That is when we can complement each other. Countries such as Vietnam, Laos and Cambodia can benefit from countries such as Malaysia, Singapore and Thailand in terms of manufacturing, investment, etc. Likewise, we have been benefiting from other countries. Many resources, such as human capital, are available to us,” he says.

Mr Omar is similarly unconcerned by some members' inability to join all AEC initiatives simultaneously. “For instance, the Asean exchanges collaboration involving six countries and seven exchanges [Vietnam has two exchanges] is being spearheaded by Malaysia, Singapore and Thailand. We would have wanted Indonesia to be involved but it felt it was not ready. So we moved ahead,” he says.

What Mr Omar would like to see more of, however, is financial integration in the region as well as more telecommunications (aside from Asiatel and Singtel) and low-cost airlines operating across Asean. “We have seen how Air Asia has grown across the region. Half of its routes in Asean are new,” says Mr Omar.

Certification standardisation would also increase integration, according to Mr Omar. “If a person is deemed to be fit and proper to serve on a board of a bank in Indonesia, then that person should be fit to sit on a board in a bank in Malaysia as well. We may not agree to harmonise all standards but we can agree to have mutual recognition. This is how sovereignty of each country will be respected,” he says.

Malaysia's prime minister, Najib Razak, has also proposed a single timezone of GMT+8 across Asean to integrate the community further – something that would set Asean apart from the EU. “That means we would align with Hong Kong and China. This would increase ease of doing business, ease for multi-national corporations to operate in Asean and it would make us more of a single bloc. When [Indonesian] president Joko Widodo visited Kuala Lumpur a few weeks ago he liked the idea. We are hopeful,” says Mr Omar.

Malaysia looks set to successfully contain the effects of drastic drops in oil prices. This is largely due to public institutions’ awareness and proactive implementation of necessary policy reforms, spearheaded by the ETP. Future oil price shocks could have even less of an impact if Malaysia's net natural gas exports are reduced as in crude oil's case, and if it continues diversifying government revenue sources with initiatives such as the GST, which is increasing an incredibly small tax base.

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