Shrinking Current Account Balance should be cause for concern


Shrinking Current Account Balance vs. USD Ringgit Exchange Rate

The above chart should give many policy makers in Malaysia a cause for concern.

It shows the Current Account Balance (Right Hand Side) for each quarter since 2010 against the Average USD:Ringgit exchange rate.

The Current Account Balance is measured as Exports of Goods and Services less imports, less the Primary and Secondary Incomes.  For a developing country like Malaysia, a strong Current Account Balance is linked to a strong Exchange rate. When the Current Account Balance weakens, then the exchange rate almost invariably weakens as well, as showed in the chart above.

From touching a peak of more than US$8,900m in 1Q10, buoyed by high prices for Petroleum, Natural Gas and Palm Oil, the Current Account Balance has crashed to under US$ 500m in 2Q16.  This is a reduction of almost 95% from recent peaks.

Most analysts are quick to blame the collapse in the price of Oil for this effect.

As shown in the chart below, the major categories to register a significant drop in exports over the last 2 years would be exports of Petroleum products, which consist of finished products like Motor Gasoline, and semi finished products like Gas Oil, but more so due the drop in the exports of Liquefied Natural Gas, or LNG.

For the first half 2016, the export of Crude and Petroleum products registered a decline of about 11% from US$9.2b in 1H15 to US$8.2b in 1H16.  However, at the same time, LNG exports fell by a massive 45% from US$6.9b in 1H15 to US$3.8b to 1H16.

From 2013 to 2016, the export price of LNG collapsed from $765/tonne to $265/tonne. In MMBtu, which is another way in which LNG is priced, the collapse is from US $14.90/MMBtu to US$4.92 /MMBtu, or a drop of 67%.

Even though the Prime Minister may not appear to be sweating about this, events in Algiers, almost 10,000 km away may provide to be a huge benefit.  The Rembau Times believes that the market is significantly under pricing an unexpected supply cut by OPEC that will send Crude up to about $58 per barrel. This will almost certainly overcome the drop in export value for Crude and Petroleum products. Natural gas, which is increasingly being priced on a spot basis versus an oil linked basis, may rally to about US $6 – US$7, but only temporarily.

If the market is correct and talks in Algiers fails to materialize to any substantial cut in OPEC production, expect a violent swing in Oil prices down to the early $30s. What is worse is that increasingly, Malaysia’s exports of Petroleum Products will have to compete against exports of products from China and the United States. For LNG, the situation is even more dire as an additional 115.8 MTPA of new LNG production capacity in Australia and the United States is expected to come on-stream by 2020. This is equivalent to an increase of 47% on current LNG imports of 250 MTPA.

To understand this, imagine if by 2020, there suddenly emerged the Oil Producing capacity of the entire Middle East in some part of the world. No doubt, the effect will be to crash the market down to perhaps even lower than the US gas pricing hubs such as Henry Hub, where Natural gas is trading at US$3.10 per MMBtu.

If such a situation were to materialize, it coincides with the Malaysian Government sustaining massive federal deficits, both on and off balance sheet to fund infrastructure projects and the potential of a trade deficit. This will cause severe pressure on the Ringgit exchange rate, leading some to even speculate that it may only be a matter of time before it is seen trading above 5 to the US Dollar.