Crude oil prices fall: subsidy needless, ringgit weaken, fiscal health affected

Malaysia's iconic Twin Towers are seen in the background of the Malaysian oil and gas company Petronas logo at a petrol station in Kuala Lumpur

DESPITE the geopolitical uncertainties in recent months – Islamic State of Iraq terrorism, Russian-Ukraine tension,Israel-Gaza conflict – Brent crude oil price has fallen to a new four-year low on Nov 13 at US$77.9 per barrel.

This is a significant drop from the average price of US$112 per barrel in June 2014. The floor price support is still not yet in sight and the downward spiral of prices seems likely to persist into 2015.

The key factors contributing to the recent drop in prices are large crude oil supply from American shale oil production, weakening demand from a subdued global economic growth outlook and also a stronger US dollar in the recent months.

Malaysia’s economy is very much dependent on the oil and gas sector. From the federal government budget revenue to the country’s exports of crude oil and petroleum products, the issue of falling crude oil prices warrants a closer inspection.

Government estimates gone awry

The Government’s projection of its fiscal position and overall economy in Budget 2015 is based on the assumption that the average Brent crude oil price would be US$105 per barrel in 2014 and US$100 per barrel in 2015. Given the substantial differences from the current market prices, the Government’s projections may no longer be in sync with the economic reality.

Budget net loss from oil prices downtrend

One notable impact of falling crude oil prices is on the government’s budget finances. On one hand, the oil and gas sector has been contributing a third to the government’s budget revenue since 2005. At the same time, the Government spends a substantial amount of its operating expenditure on fuel subsidies – an estimated of 8.5% of budget operating expenditure in 2014. Therefore, sliding crude oil prices is a double-edge sword to the country’s fiscal health.

To put the issue in perspective, the estimated budget revenue contribution from the oil and gas sector is around 6% of gross domestic product (GDP)in recent years while fuel subsidy costs the government around 1.7% of GDP in 2014. As such, the impact of lower budget revenue will outweigh expenditure savings from lower fuel subsidy cost.

Therefore, if the current blanket fuel subsidy mechanism is left status quo in light of falling crude oil prices, the circumstances would risk our nation’s fiscal deficit targets. Keep in mind that the government has committed to reduce the current fiscal deficit to GDP estimate of 3.5% in 2014 to 3% in 2015 and ultimately achieve a balanced budget by 2020.

Timely goods and services tax

No doubt the heavy dependency on the volatile oil and gas sector for budget revenue is beginning to show signs of cracks. The issue is even more pressing now that budget revenue is squeezed from falling crude oil prices.

Therefore, the broad-based goods and services tax (GST), which will enhance tax revenue collection, is considered timely at this juncture. However, the implementation of GST is only part of the long term solution to fiscal sustainability. The government must also look into the expenditure side of the budget finance to manage its fiscal prudence.

New subsidy mechanism or market prices?

Based on the current crude oil prices, the government is only subsidising RM0.13 per litre for RON95 and RM0.12 per litre for diesel in November, compared to RM0.47 per litre subsidy for RON95 and RM0.59 per litre subsidy for diesel in September – before the October RM0.20 per litre fuel price hike.

According to the Finance Ministry, if global crude oil prices fall to a low of between US$70 and US$75 per barrel, the Government would not be providing any subsidy for fuel at the current fixed price of RM2.30 per litre for RON95 and RM2.20 per litre for diesel.

Since the market pump prices are approaching a level that would require no subsidy at all, there is an urgent concern to review the sustainability of the current blanket fuel subsidy approach.Although the government has proposed to initiate a new targeted fuel subsidy rationalisation programme based on individual income thresholds, the circumstances demand a review of subsidy provisions.

Ultimately, fuel subsidy is not sustainable in the long run. Whether the government initiates a tiered fuel subsidy provision or not, the reality is that fuel subsidy should not be entrenched indefinitely.

To plan ahead for fiscal prudence, the government’s initiative to move towards a managed float pump prices is appropriate at this juncture.

When global crude oil prices are depressed, consumers would certainly rejoice. However, when there is a reversal of crude oil prices, the government could then step in to provide targeted assistance to the low-income households. As the government would be sensitive to the impact of rising cost to the low-income group, savings from fuel subsidy expenditure could be channelled to the targeted needy households.

The Bantuan Rakyat 1Malaysia (BR1M) provisions for eligible households and single individuals amount to around RM4.9bil in 2015, benefitting around 7 million recipients. Therefore, the low-income group has already been identified through the BR1M database. The government can consider to top up on BR1M with a supplementary monetary provisions equivalent to a cost of living allowance to compensate for the upside volatility of market fuel prices.

If the government would consider providing an additional RM250 to its BR1M provision for each eligible households and single individuals as the supplementary allowance, total BR1M payment for eligible recipients in 2015 would amount to around RM6.7bil.

Therefore, from the perspective of fiscal management, doing away with fuel subsidies would greatly assist the government to meet its fiscal objectives. From Budget 2015, the Government has allocated around RM37.7bil for subsidy expenditures. Based on historical trend, around 55% of total subsidy allocated is for fuel subsidies.

If the government considers abolishing subsidies for fuel in 2015, it could save up to RM20.7bil from the operating expenditure. Given that the projected fiscal deficit is around RM35.7bil for 2015, the savings from fuel subsidy will assist the government to meet its fiscal deficit targets. Furthermore, the government can also save billions of ringgit for money not spent on upgrading petrol pumps to accommodate the proposed tiered fuel subsidy mechanism.

As long as the provision for the additional supplementary allowance to BR1M does not exceed the savings from fuel subsidy expenditure, subsidies would be channelled to the targeted group while narrowing the fiscal deficit along the way.The cost of living allowance can be claimed through the BR1M distribution channel. This will assist the government to meet its fiscal deficit to GDP targets.

One way or another, it is still monetary subsidy provisions by the government. However, a more targeted approach to distributing provisions and also doing away with the heavy dependency on subsidies are the right approach moving forward not only for the fiscal health but also to the fundamental competitiveness of the economy.

By Manokaran Mottain, chief economist at Alliance Bank Malaysia Bhd.

Ringgit Falls for Sixth Week in Longest Stretch This Year on Oil

Malaysia’s ringgit fell for a sixth week, the longest losing streak this year, as a slump in crude oil prices threatens to crimp government revenue in a nation that’s a net exporter of the fuel.

The ringgit is Southeast Asia’s worst-performing currency in the second half as Brent crude lost 29 percent since the end of June. Oil-related industries account for 30 percent of government revenue. While a weaker exchange rate helps lower export prices it makes imports more expensive. A report today showed inflation quickened to 2.8 percent in October from a year earlier, compared with 2.6 percent the previous month.

“The drop in commodity prices, especially crude oil, is to be blamed for the ringgit weakness,” said Wong Chee Seng, a foreign-exchange strategist at AmBank Group in Kuala Lumpur. “The fact that the ringgit is a high-beta currency also didn’t help,” he said, referring to a measure of volatility.

The ringgit depreciated 0.3 percent from Nov. 14 to 3.3555 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. It touched 3.3681 yesterday, the weakest level since March 2010, and has lost 4.3 percent since June 30.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options and a gauge of risk, increased 16 basis points, or 0.16 percentage point, to 7.15 percent this week.

Subsidy Announcement

The ringgit led gains among Asian currencies today, rising 0.3 percent, after the government said in a statement that it will remove subsidies for fuel and diesel from Dec. 1 and as Brent rebounded.

“The ringgit strengthened today because of the increase in crude oil prices,” said Saktiandi Supaat, the Singapore-based head of foreign-exchange research at Malayan Banking Bhd. “The announcement on the subsidy removal gave further support.”

Malaysia’s 10-year government notes fell for a second week. The yield on the 4.181 percent securities maturing in July 2024 rose three basis points to 3.9 percent, data compiled by Bloomberg show. The yield dropped three basis points today. - Bloomberg

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Xiangshan Defence Forum: Regional military chiefs hail Beijing's security proposal

Photo taken on Nov. 21, 2014 shows the scene of the plenary meeting of the 5th Xiangshan Forum in Beijing, capital of China. The two-day Xiangshan Forum focuses on security in the Asia-Pacific region. The biennial event, organized by China Society of Military Sciences, has been held since 2006. It will be held annually starting this year. (Xinhua/Shen Dongdong) 

• Crossover: Xiangshan Forum kicks off  

  Han Bin...

 Regional military chiefs hail Beijing's security proposal

Chinese military academic delegate Wang Yisheng talks to British delegate John Kingwell (center) and Observer Simon Levey during the Xiangshan Forum attended by senior officials and academics from Central Asia and the Asia-Pacific region in Beijing on Friday. PETAR KUJUNDZIC / REUTERS

At a glance • Xiangshan Forum, first held in 2006, and initially staged every two years. Upgraded to an annual event this year. • About 300 delegates from 47 countries and four international organizations attending this year. • This year's theme is "Cooperation and Win-Win Build an Asian Community of Common Destiny". • Held from Thursday to Saturday, the forum discusses regional and maritime security and anti-terrorism cooperation.

China proposed on Friday that disputes in the Asia-Pacific region be tackled by an efficient crisis management and control mechanisms.

The proposal, put forward at a major defense policy forum in Beijing, won widespread acclaim from military chiefs and leading defense specialists in the region.

They said a liaison system has yet to be established to help the economically dynamic region tackle looming geopolitical concerns, and the proposal will help to resolve this.

In an address to the fifth Xiangshan Forum, State Councilor and Minister of National Defense Chang Wanquan said that China held 2,000 talks or meetings last year with neighbors on border issues.

China seeks to further enhance dispute management procedures, boost defense cooperation and "strengthen the regional security architecture", Chang said in a three-point proposal.

Singapore's Defense Minister Ng Eng Hen endorsed Chang's proposal and underscored the need to build an Asian security framework to set up meetings and cool any potential tension.

Malaysian Defense Minister Hishammuddin Hussein also backed Chang's proposal.

Yin Zhuo, director of the PLA navy's Expert Consultation Committee, said Asia-Pacific is "the only region in the world that still suffers from the wounds of the Cold War", and a security mechanism, like that established in Europe, has yet to be set up.

The forum provides a platform that "transcends different ideologies and involves all regional stakeholders", Yin added.

Some Western analysts have speculated that the China-led forum was upgraded from an event held every two years to an annual one earlier this year to steal the thunder from the Shangri-La Dialogue held in Singapore.

Singaporean Defense Minister Ng told Friday's plenary session that more opportunities for dialogue should be given to high-ranking military officials in the region, and meetings such as the Xiangshan Forum help to keep areas of tension from spiraling out of control.

Zhang Tuosheng, director of the Department of Research at the China Foundation for International and Strategic Studies, said China is a major player in the region, and "such platforms do not conflict with each other because they are working in concert to shape a safer region".

Ruan Zongze, vice-president of the China Institute of International Studies, said changing mindsets is important, adding that, "It may take quite a long time to shape a strong and popular belief of win-win cooperation."

Chang dismissed any connection between China's "justified" defense budget growth and allegations of "growing assertiveness" by China.

Military modernization "serves China's practical need to secure its own borders" Chang said.

He told the forum, "To defend our own security is a most direct contribution to security and stability in the Asia-Pacific region."

Andrei Kokoshin, director of the Institute for International Security Studies at the Russian Academy of Sciences and former secretary of the Russian Security Council, said the modernization of the People's Liberation Army is playing a positive role in boosting regional security and stability.

By Zhangyunbi China Daily, News Network

 Chinese DM addresses Fifth Xiangshan Forum

Gen. Chang Wanquan, state councilor and minister of national defense of the People’s Republic of China (PRC), is delivering a speech on the topic of China’s armed forces and Asia-Pacific security at the Fifth Xiangshan Forum in Beijing on the morning of November 21, 2014. (Chinamil.com.cn/Sun Xiaoxu)

Keynote Speech at the Fifth Xiangshan Forum

by General Chang Wanquan, State Councilor and Minister of National Defense, 21st November 21, 2014

Ladies and gentlemen, dear friends, good morning! I am very glad to meet all of you here at Xiangshan. Let me begin by welcoming you all to the Fifth Xiangshan Forum on behalf of China’s Ministry of National Defense and the People’s Liberation Army (PLA). I wish to take this opportunity to share with you my views on this topic—China’s armed forces and Asia-Pacific security.

　　The remarkable growth of China’s comprehensive national power, and the continued progress in national defense modernization, have become a focus of international attention in recent years. First of all, I would like to explain, from both historical and contemporary perspectives, why China has accelerated the modernization drive of its national defense and armed forces.

　　First, China has learned a bitter lesson from its wretched modern history. The Chinese civilization is one of the oldest in the world. As we entered the modern era, however, Chinese people suffered grievously in a semi-colonial and semi-feudal society because of the corruption and incompetence of their feudal rulers, coupled with unrelenting aggressions of foreign powers. Our people did not become masters of their own destiny until a century later, after a protracted struggle. When it comes to national sovereignty and security, the Chinese give great credence to the adage, “We should not rely on the likelihood of the enemy’s not coming, but on our own readiness to receive him.” Therefore, China is firmly determined to promote the modernization of its national defense and armed forces and effectively safeguard its national sovereignty, security and development interests.

　　Second, military modernization serves China’s practical need to secure its own territory. China has a vast territory and a large population. Its land borders, mainland and island coastlines are very long indeed. In particular, China has not yet fully realized national reunification. These are all factors which place the Chinese military under heavy pressure in securing the country and its border areas. There is therefore a pressing need for China to strengthen its national defense and armed forces. It should also be noted that to defend our own security is a most direct contribution to the security and stability in the Asia-Pacific region.

　　Third, China has to adapt to the revolution in military affairs. As the revolution in military affairs gains momentum worldwide, every country is dedicating efforts to modernizing its armed forces or conducting various degrees of military reforms. At present, the Chinese military has yet to become fully mechanized and its application of information technology is still at an early stage. It lags far behind those advanced military forces elsewhere in the world. A decision to strengthen the reform of China’s national defense and armed forces was adopted at the Third Plenary Session of the 18th Central Committee of the Communist Party of China. Mindful of the goal of building a strong military, we are now exerting ourselves to develop a system of modern military force with Chinese characteristics. This is a sure choice that China has made in keeping with the times.

　　Fourth, military modernization serves the overall interests of China’s reform, opening up and development. China initiated the historic process of reform and opening up in the late 1970s. The Chinese military, committed to serving the larger goals of reform and development, has made a unique contribution to China’s economic takeoff. Since the beginning of the new century, China’s armed forces have benefited from the country’s economic growth and stepped up their efforts to pursue modernization. The move is mainly intended to ensure the balanced development of national defense and the economy, and provide a more effective safeguard to China’s economic and social development as well as its expanding overseas interests. It should be noted that China has not changed the basic state policy of taking economic development as the central task. Its military growth has always been kept at a reasonable level.

　　Fifth, China is under an obligation to work together with other countries to cope with non-traditional security threats. In recent years, the threats of terrorism, separatism and extremism have mounted, in addition to frequent and major natural disasters and new challenges to the security of sea lines of communication. Such non-traditional security issues have become the common concern of all countries in the Asia-Pacific region. Against this backdrop, we have attached greater importance to the employment of armed forces in peacetime. It has shouldered increasing international obligations in areas such as UN peacekeeping, international anti-terrorism, commercial vessel protection, international disaster relief, and humanitarian assistance. Accelerating the modernization of national defense and armed forces will also enable China to come up with a better response to the various security challenges in collaboration with other countries and live up to its role as a responsible major country.

　　Ladies and gentlemen, dear friends, the world today is undergoing major developments, changes and adjustments. The global trends toward multipolarity and economic globalization are deepening. Cultural diversity is increasing, and an information-based society is fast emerging. The security landscape in the Asia-Pacific region is largely stable. As they depend on each other for security and development, countries in the region have formed a community of common destiny in which they will prosper or decline together.

　　Last May, Chinese President Xi Jinping put forward an Asian security concept that calls for common, comprehensive, cooperative and sustainable security. While expressing hope that Asian countries advance common security in the spirit of inclusiveness and cooperation, he welcomed the participation of other countries concerned. The concept offered a new vision for Asia-Pacific countries to cope jointly with security challenges. The Chinese military will uphold this concept as a participant and promoter of international security cooperation. It is willing to develop an approach to Asian security alongside the armed forces of other countries that features joint efforts, shared benefits and win-win results.

　　First, for the sake of common security, China has dealt with sensitive disputes in an appropriate fashion. It is to be expected that disputes will arise between nations. The key is to strengthen management and effectively prevent and resolve crises. Along its land borders, the Chinese military has set up 64 border defense force meeting venues, where in 2013 alone more than 2,000 meetings were held with neighboring countries. China and India have jointly implemented their Border Defense Cooperation Agreement to maintain border peace and stability. As far as naval cooperation is concerned, the Chinese Navy has conducted 16 joint patrols in the Beibu Gulf with the Vietnamese Navy. China is also exploring the possibility of opening a defense hotline with the ASEAN countries. Only recently, China’s Ministry of National Defense and the U.S. Department of Defense signed two memorandums of understanding on Notification of Major Military Activities Confidence-building Measures Mechanism and The Rules of Behavior for Safety of Air and Maritime Encounters. With these practical moves and more, we have contributed to regional peace and stability and done our utmost to create a positive environment for the development of all countries in the region.

　　Second, China has engaged in regional security dialogue to promote cooperative security. We are committed to candid and in-depth talks with other parties in a bid to expand the common ground for Asia-Pacific defense and security cooperation. To date, China has established defense and security consultation and dialogue mechanisms with 26 countries. In recent years, China has held more than 80 joint military exercises and training sessions focusing on areas such as anti-terrorism and disaster relief with more than 50 countries. China’s defense authorities and armed forces have taken an active part in regional multilateral security cooperation. They have played an important role in multilateral security mechanisms such as the Shanghai Cooperation Organization, the ASEAN Regional Forum and the ASEAN Defense Ministers’ Meeting Plus. This Xiangshan Forum where we are gathered is an example of the efforts of the Chinese military to promote security dialogue and cooperation.

　　Third, China has been active in providing public security goods in pursuit of comprehensive security. As security challenges become increasingly interconnected, transnational and comprehensive, there has been a rising demand for public goods in the global security filed. Since 2002, the Chinese military has carried out 39 international emergency humanitarian assistance operations. It has shipped more than 1.3 billion yuan (＄212 million) in aid materials to 30 disaster-ridden countries. Since the end of 2008, China has dispatched 18 naval task forces to the Gulf of Aden and the waters off Somalia. These have provided an escort to almost 6,000 Chinese and foreign ships. China has contributed more peacekeeping troops than any other permanent member of the UN Security Council - a total of more than 27,000. Currently, 2, 027 Chinese peacekeepers are working with nine UN peacekeeping missions. In order to cope with the Ebola outbreaks in West Africa, the Chinese military has sent almost 300 doctors and nurses to epidemic-affected areas. It has built an Ebola holding-center in Sierra Leone and will soon complete the construction of a 100-bed Ebola treatment center in Liberia. This represents a humble contribution to the fight against the deadly virus.

　　Fourth, China has reinforced results-oriented defense cooperation to boost sustainable security. The armed forces constitute the cornerstone of national security. Whether a country is secure and whether its security is sustainable hinge on its ability to protect itself. The Chinese military has, to the best of its abilities, helped other countries, especially developing countries, to strengthen their armed forces. While taking into account the long-term development of these countries’ armed forces, it focuses on improving their overall capability to safeguard national security. Since 2003, China has trained more than 30,000 military personnel for over 130 countries. It also assists other developing countries every year by providing military aid with no political strings attached. Much of this material is used for the construction of such infrastructure as military academies and hospitals.

　　Ladies and gentlemen, dear friends, while Asia-Pacific security cooperation looks promising, we still have a long way to go to secure our region. All countries should work in concert for its peace, stability and enduring prosperity.

　　We call for further strengthening of dispute management procedures to improve our ability to cope with crises. We believe that peace and stability in the Asia-Pacific region should be put at the top of the agenda. Disputes should be resolved through negotiations with full respect to historical facts and the international law. The parties concerned should establish accessible and efficient dispute management and control mechanisms, refine their capacity to deal with crises, and prevent disputes from escalating. The Chinese military stands ready to seek appropriate solutions to relevant issues in collaboration with other parties by sharing information in a timely manner through a variety of liaison mechanisms at different levels.

　　We call for further strengthening of defense exchanges and cooperation to bolster strategic mutual trust. All countries should promote regular, open and inclusive contacts between their respective defense authorities and armed forces. They should put in place regular defense and security consultation mechanisms, reinforce bilateral and multilateral exchanges, forge a growing consensus, and enhance strategic mutual trust. We are willing to work together with other parties to promote the growth of positive military-to-military relations in the Asia-Pacific region by strengthening wide-ranging, multi-tiered and all-round cooperation.

　　We call for further strengthening of the regional security architecture to foster a stronger sense of belonging to a community of common destiny. We advocate that countries should transcend Cold War thinking and base their decisions on the reality of the Asia-Pacific region. They should take all parties’ security concerns into consideration. They should also accommodate each other’s comfort levels as they build an open, transparent, equal and inclusive Asia-Pacific security architecture.

　　Ladies and gentlemen, dear friends, President Xi Jinping said at a recent APEC event, “Those who share the same ideal and follow the same path can be partner. Those who seek common ground while shelving differences can also be partners. More friends, more opportunities.” Let us commit ourselves to the goal of forging an Asia-Pacific partnership featuring mutual trust, inclusiveness, cooperation and win-win results, and join hands to create a bright future for our region.

　　Thank you!

Editor :  Zhang Tao   

China's revival of 600-year-old links in Asia, Africa, Europe and the Americas

 Malaysia and China have great plans for a 21st century version of an ancient trade route from China that reached as far as Europe and the Americas

Maritime trade between China and other countries dates back to the Qin and Han dynasties.

Merchant ships that departed from China sailed into the South China Sea carrying silk, porcelain ware, tea and other commodities.

The ancient trade route reached as far as Europe and the Americas, forging friendships and exchanges.

Today, China has a grand vision: to revive a 21st century version of this ancient maritime corridor by inviting countries from Asia, Africa, the Americas and Europe to come on board the present-day route.

According to an article in the Asia Weekly of China Daily, an English-language newspaper, the proposed 21st century Maritime Silk Road (MSR) begins in Quanzhou in Fujian province, moves on to Guangzhou in Guangdong province and Beihai in Guangxi Zhuang autonomous region, and then heads south to Hanoi, Vietnam.

Continuing south to Kuala Lumpur on the Strait of Malacca, the MSR joins Jakarta, Indonesia, crosses the Indian Ocean to Nairobi, Kenya, and then links with Colombo, Sri Lanka and Male, the Maldives.

China has taken many initiatives to promote the 21st century MSR since its president Xi Jinping first brought up the idea during his visit to Indonesia in October last year.

One of the most recent efforts was the Guangdong 21st Century Maritime Silk Road International Expo, which brought together more than 40 countries and regions to seek cooperation in the fields of economy, trade, tourism and culture.

Guangdong party secretary Hu Chunhua, during the opening ­ceremony of the expo in Dongguan, touted the 21st century MSR as a road of peace and friendship that brings about mutual cooperation and benefits.

He said Guangdong is a convenient transportation hub linking China with countries along the MSR.

“The inland provinces join the MSR and venture out to the world through Guangdong, while Guangdong is also the entry point for resources to come into China from the outside world,” he said of the strategic location of Guangdong.

In the past, Guangzhou, the capital of the southern province, was a major stop on the ancient trade route. Records show that close to 90 per cent of the merchant ships from the West docked at its Huangpu Port from 1685 to 1757.

The glory remains today, with Guangdong ranking first among all provinces in China in terms of economic output, trade volume and population.

Last year, both its gross domestic product and total imports and exports exceeded US$1 trillion.

Trade between Guangdong and Malaysia, China’s largest trading partner in Asean, stood at US$26.81 billion.

Tourism Malaysia chairman Dr Ng Yen Yen said Malaysia’s participation at the expo, the ­largest among all countries, reflected our readiness for greater collaboration and cooperation with countries along the MSR.

In her speech at a forum held ­during the expo, she said ties between both countries can be traced back to 600 years ago when Admiral Cheng Ho visited Malacca during his seven naval expeditions to the Western Ocean.

On the tourism front, Dr Ng proposed a multiple-destination cruise route along the 21st-MSR that will provide vast opportunities for multi­lateral economic cooperation.

Meanwhile, an Institute of Maritime Silk Road Tourism and Culture was established during the expo.

A collaboration between the Guangdong Tourism Board and the South China Normal University, the institute will be a platform for academic research and exchange on topics related to the Maritime Silk Road, such as tourism, culture, education and regional development.

By Tho XIn Yi The Star/Asia News Network

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