Nov 17, 2014

Malaysia: Government’s Oil Conundrum


Government’s dependence on petroleum related income is declining:malaysia_oil_income
•  A market concern currently, which appears to be hurting Malaysia more than its regional peers, is the impact of falling oil price on government finance. This concern does not appear to be fading away, at least during this week.
•  The price of Brent crude oil completed a 30% retracement from its 52-week high last week. That is rather disconcerting. Russia’s President Putin has even remarked that the country is preparing for a “catastrophic” slump in oil prices.

Brent completed a 30% retracement from 52-week high last week:

•  In the case of the Malaysian Government, its collection of petroleum income tax in particular is calculated based on crude oil price (Tapis) assumptions of USD110pb and USD105pb in 2014 and2015 respectively. Assuming that the price of Tapis averages USD85pb in 2015, we estimate that the Goverment may be looking at a shortfall in revenue amounting to RM5.7b assuming Petronas pays the projected dividend of RM27b.
•  Those predicting a government financial crisis have their concerns rather exaggerated. The fact is the Federal Government’s dependence on petroleum
related income is declining. It used to be as high of 39% of its total income in 2009, but with the implementation of GST, the incidence is expected to ease to 26% in 2015 (see table).
•  In addition, lower crude oil price also means lower fuel subsidy which amounts to about RM21b a year. This will offset the shortfall in revenue.
•  The fact is lower crude oil price can be an impetus to real economic activity. In our report “Living in a World of Cheaper Oil” released today, we foresee the transport and power generation industries to benefi t from the current situation.


Small-caps vulnerable:

•  After a promising last few days of October, the situation has reversed. November has simply been disappointing.
•  As of last Friday, the KLCI and FBM70 had lost -2.2% and -3.5% respectively for the month. The FBM Smallcap had lost a whopping -5%. Without any clear evidence that things are turning around, we could be looking at the worst November for the local equity market since the Financial Crisis.

•  The situation is rather dire for the small caps.Technically, this class of stocks is rather vulnerable,as the 50-day moving average line appears set topierce the 200-day moving average line this week(see chart). This is the so-called “death cross”, and is a harbinger of bearishness. The KLCI and FBM70already completed the “death cross” earlier.