Impact on Ringgit with Oil Price War

A possible oil price war between Saudi Arabia and Russia would break-out after the latter refused to support supply cuts recommended by OPEC.

The price of Brent oil contracts fell sharply by 8.9% or USD4.45 a barrel to close at USD45.54 a barrel last Friday with the potential to go down further as traders anticipate a fight for market share among major producers. The current market price of oil is far different from Putrajaya’s assumption of USD62 per barrel in Budget 2020. This poses constraints to the federal government’s budget targets and economic stimulus package launched recently.

In 2015, the oil slump had caused oil revenue for the Malaysian government to shrink to RM42.7 billion from RM62.5 billion in 2014. The amount declined was sharper at RM28.1 billion in 2016. According to AmBank Group chief economist and head of research Dr Anthony Dass, for every US$1 per barrel drop in the oil price, it will reduce oil revenue by RM300 million. “With the risk of the oil price weakening to USD20–25 per barrel, it could increase our revenue loss by RM11.1–RM12.6 billion,” he said. “Thus, pressure on the fiscal deficit/gross domestic product (GDP), which is now at 3.4%, could rise to 3.6%–3.8% of GDP based on an RM8.1 billion loss in revenue.”

What about our Ringgit exchange rate?

The above graph shows the regression plot of Brent Oil Price vs. Ringgit with monthly data retrieved from Feb 2010 to Jan 2020. The scattered blue dots plots out the historical exchange rate (USD/MYR) corresponding to respective Brent Oil Price. The fitted regression line (the red line) on the other hand represents the relationship between exchange rate and oil price. In short, the graph shows that the Ringgit weakened when oil price dropped.

On 10 March 2020, Barclays became the latest bank to revise its oil price outlook for this year. The UK bank cut its forecast for Brent crude to USD43 a barrel from USD59. And based on our regression model (R² = 0.76), this indicates that the Ringgit would drop to 4.2534 against the USD (when price of crude is at USD43 per barrel). If the oil price dropped further to USD20 per barrel, based on our model, the Ringgit could drop to 4.6411 against the USD.

Reference:

1.     AmBank Group: Malaysia could lose up to RM12.6 billion revenue from weak oil price, 10 March 2020, The Edge

2.     Budget 2020 needs to be revised amid falling oil prices, say analysts, 12 March 2020, The Malaysian Reserve