While the political drama in the country is the most talked-about topic now, it’s time to turn our attention back to money matters. Our livelihood depends on it.
OUR ringgit hit another new low last week and there is every likelihood it will continue to be under heavy pressure as the price of crude oil keeps collapsing.
The prediction is that the price of crude oil will continue its slide and that Malaysia, as an oil-exporting country, will continue to bear the brunt.
Unlike Saudi Arabia and Russia, which have huge financial reserves, other oil-exporting nations, especially the smaller ones like Malaysia, and those in Africa and South America, are in a real dilemma.
Malaysia is in a position it does not need. It is something that even our policy-makers could not have foreseen. The situation is made worse because of the drop in commodity prices.
Since the implementation of the GST in April, most companies have seen a huge drop in revenue and, by extension, their profits. As the second quarter results are rolled out in the coming weeks by the public-listed companies, we can expect most of them to post lower revenue and profits, if not losses.
Consumers have to cope with the increasing cost of living and market sentiments are weak.
Our stock market has also been hit with the anxiety over the slowdown in China, which is a major export market for many Malaysian companies. The local political sentiments have certainly not helped inspire confidence among foreign investors.
Why does the price of crude oil continue to slump when we are made to believe that we need to seek alternative sources of energy as the world is running out of oil?
According to reports, demand is now low because of weak economic activity, increased efficiency and more opting to switch from oil to other fuels.
Interestingly enough, the turmoil in Iraq and Libya – two big oil producers with nearly four million barrels a day combined – has not affected their output, it was reported.
News reports also said that unknown to many people, America has become the world’s largest oil producer. Although it does not export crude oil, it now imports much less, creating a lot of spare supply worldwide.
Total American inventory of crude oil and refined fuels are at the highest levels now since records began. The oversupply situation is global and refiners are now reducing their run rates.
But even a major player like Saudi Arabia has refused to cut down supply to bring stability to the price as it believes it would only benefit its rivals, Russia and Iran.
This is a form of geopolitical rivalry which the world can only watch but do nothing about.
No one foresaw that sanctions against Iran would be lifted by the United States, resulting in another drop in oil price.
Saudi Arabia is able to sit pretty, do nothing, and watch the price of oil plummet because it is said to have a lot in its reserves. However, the latest issue of Financial Times has reported that Saudi Arabia’s foreign reserves is now at US$672bil (RM2.6 trillion), down from a peak of US$737bil (RM2.8 trillion) in August last year.
The other advantage for the Saudis is its low production cost to pump oil from the ground, reportedly only US$5 to US$6 (RM19.60 to RM23.50) per barrel. It is still making a huge profit margin even if the price of oil drops below US$50 (RM196) per barrel. Other producer countries have to deal with their high production costs.
All these uncertainties affect Malaysia. It is a costly venture for Bank Negara to take out huge sums of money to defend our ringgit as no one can tell how far the oil prices will be dragged down in future.
So far, most of the analysts and experts have failed to get their readings right. It is rather ironic that the Indian currency exchange traders at our malls have a better understanding of the currency situation.
If this bad run continues, it will have implications for our economic and political situations. The ordinary consumer is unlikely to have an understanding of how the price of global crude oil will affect his wages and cost of living.
The politicians are likely to put the blame entirely on the national leadership for their purported incompetence.
Malaysia has already revised its growth rate and it will certainly need to take a hard look again when the Budget is presented in the coming months.
Bank Negara keeps us updated fortnightly on our international reserves situation. On Friday, it issued a statement declaring that our international reserves totalled RM364.7bil or US$96.7bil at the end of July, which is a decline of RM14.7bil or US$3.8bil from two weeks ago.
It said the reserves position is sufficient to finance 7.6 months of retained imports and is 1.1 times the short-term external debt.
Our reserves had fallen from RM379.4bil (US$100.5bil) as at July 15 while the ringgit has weakened by nearly 12% against the US dollar year to year.
Last week, The Star quoted Equities Research estimating that cumulative net foreign outflow from Malaysian equities rose to RM11.7bil at the end of July, significantly surpassing the RM6.9bil outflow for the entire 2014.
In its report issued on Monday, it said foreign money outflow from Bursa-listed companies continued unabated last week.
“Foreign investors have now been net sellers on Bursa for 14 consecutive weeks, the longest stretch of back-to-back weekly selldown since the 2008 financial crisis,” it said.
MIDF Research pointed out that in the week ended July 31, investors classified as “foreign” sold equity listed in the open market on Bursa (that is excluding off-market deals) amounting to RM845mil on a net basis, edging up from RM830.1mil the week before.
Foreign selling was heavy on Monday to Wednesday, with daily net sales exceeding RM200mil, but less than RM300mil.
This means that the daily threshold has already been exceeded 26 times this year compared with the whole of 2014, when there were only 23 days when net sales surpassed RM200mil.
The combination of domestic and external factors is hurting our economy. We need our leaders to put their focus back on the economy.
Malaysians may think that a topic like this is too dry compared with the many political dramas unfolding in our country. But we should look at these economic issues closely to understand how we are faring as a nation. At the end of the day, all these developments will affect our pockets or, to put it more seriously, the food on our table.
