From www.stratfor.com

Summary

Southeast Asia’s major net exporters of oil, Malaysia and Vietnam, face budgetary problems as oil prices drop during a global recession. For Malaysia, the problems are particularly worrisome and could undermine the credibility of the ruling government.

Analysis

As global oil prices plummet in recessionary times, Southeast Asia’s top two net oil-exporting countries, Malaysia and Vietnam, both face problems with their budgets — which were prepared when oil prices were expected to remain high and were based in part on estimated average prices for oil in the coming year.

In the first half of 2008, inflation drove global oil prices up to a record $147 per barrel. The rapid price spikes left a deep impression on the world’s governments, with the depth of that impression depending on whether the country was an oil exporter or an oil importer. Oil producers were thrilled at the prospect of high profits; governments in oil-exporting countries were thrilled with the idea of overflowing piggy banks. When it came time to submit federal budgets for fiscal year 2009, the question on everyone’s mind was where oil prices would settle once the sudden inflationary pressures abated.

What some countries did not anticipate was that oil prices would fall as low as they have — currently at around $40 per barrel. The drastic price drop has taken many governments by surprise and will leave gaping holes in their budgets. And the drop in global demand as the recession continues likely will keep oil prices low for some time.

Vietnam predicted that oil would sell for an average of $90 per barrel in fiscal and calendar year 2009 and budgeted accordingly. This was a high estimate compared to other oil-exporting countries — Mexico bet on $70 per barrel, Saudi Arabia $65 and Venezuela $60. Vietnam relies on oil exports for about 28 percent of its total tax revenues of $9.5 billion, so about half of its oil tax revenues ($1.3 billion) will vanish if oil averages $45 per barrel through the year. Vietnam also is vulnerable in other ways because it has an export-dependent economy subject to rapid capital outflows, and it has opened up to foreign banking and hence the credit crunch. Fears of the deficit ballooning out of control prompted Vietnam’s State Assembly to pass legislation Nov. 8 that shrinks the budget and caps the deficit at 4.8 percent of gross domestic product. High budget deficits risk cutting into the attractiveness of Vietnamese bonds at a time when investors worldwide are risk-averse.

But Malaysia’s predictions for global crude prices next year are even more troublesome. Kuala Lumpur passed its budget on Aug. 29, when oil prices stood at about $115 per barrel, and decided not to alter its 2008 estimate of $125 per barrel for 2009. This estimate is more than twice as much as Venezuela’s. With oil prices now milling around $40 per barrel, Malaysia stands to lose a significant portion of its total tax revenues. Oil export taxes were expected to account for 46 percent of total revenues in 2009, up from 40 percent in 2008. If Malayisa’s Tapis crude averages $45 per barrel, Kuala Lumpur will lose approximately 29 percent of its revenues, or $14 billion.

This potentially huge loss in revenue will compound Malaysia’s existing budget flaws. Kuala Lumpur will likely end up with a 4.8 percent budget deficit in 2008, well over its predicted deficit of 3.5 percent of GDP. Moreover, there will be a pressing need to expand government spending in 2009 to stimulate the economy and fend off recession. Some analysts envision the budget deficit reaching 5.7 percent of GDP next year. Malaysia will have to revise its budget, but the government will not want to cut spending, as fiscal stimulus is needed to buoy the economy and win popular support. The country’s credit rating will be on the line.

These economic stresses will have marked political ramifications for Malaysia. In many ways, the current global recession will be Malaysia’s biggest challenge since the departure of former Prime Minister Mahathir Mohamad, who led the country through the Asian financial crisis of 1997-1998. Without Mahathir’s paternal guidance, Malaysia is less certain of what course to take. The ruling United Malays National Organization already has come under serious fire from the opposition movement, led by Anwar Ibrahim. Anwar certainly will receive a boost from the budget fiasco, as Najib Razak, up for election as the next prime minister in March, has served as finance minister since September. Although this was after the budget was written, Najib will have to fess up to his own government’s botched budget.