Malaysia new five-year plan highlights petchem diversification

Focus article by Nurluqman Suratman

SINGAPORE (ICIS)–Diversification of oil, gas and chemicals industries in Malaysia will be an important pillar of the country’s economic blueprint for the next five years that envisages a 5.0-6.0% annual GDP growth.

Prime Minister Najib Razak recently unveiled a $72bn plan aimed at bolstering consumption and private investment in southeast Asia’s third-biggest economy in 2016-2020.

The start-up of PETRONAS’ major project in Johor called the Refinery and Petrochemical Integrated Development (RAPID) falls within the five-year timeframe. By mid-2019, Malaysia will have an additional 300,000 bbl/day of oil refining capacity.

The project will be able to produce EURO 4M and EURO 5 – fuel grades that meet Europe’s emissions standard – and 7.7m tonnes/year of various grades of specialised products such as synthetic rubber and high grade polymer by 2020.

The RAPID project, which is estimated to generate around $20bn in investment, is located within the Pengerang Integrated Petroleum Complex (PIPC), which will have liquefied natural gas (LNG) import terminals and a regasification plant.

The first phase of PIPC alone will contribute Malaysian ringgit (M$) 18.3bn to the country’s gross national income by 2020 and create more than 8,000 jobs, according to the country’s Ministry of International Trade and Industry.

In its new five-year economic plan, however, Malaysia aims to reduce its dependence on oil-related revenue, which should account for 15.5% of the government’s total by 2020, down from about 30% currently.

Malaysia has cut its average oil price assumption to $55/bbl in the formulation of its national budget this year from $105/bbl previously, and is bent on finding ways to diversify its revenue sources.

Low oil prices should spur innovation, as they lead to stronger demand for cost-saving technology and services.

Malaysia intends to migrate all its economic sectors into more “knowledge-intensive and high-value added activities” in the next five years, with its manufacturing sector shifting towards more diverse and complex products in three catalytic subsectors, namely chemicals, electrical and electronics (E&E), and machinery and equipment.

Manufacturing is expected to grow at an annual pace of 5.1% over the next five years, and account for 22.5% of GDP, with an 18.2% share to total employment by 2020, according to the country’s Economic Planning Unit.

In the previous five-year plan, growth in the chemicals subsector is projected at an annual average of 3.4%, with the value-added proponent seen increasing to M$27.8bn this year from M$24.8bn in 2011, as the sector supports fast-growing industries such as automotive, E&E, pharmaceuticals, and construction, it said.

Malaysia Prime Minister Najib had said at the recent Asia Oil and Gas Conference (AOGC) in Kuala Lumpur that stimulating economic growth should be prioritised over finding ways to curb the global oil supply glut, which has been depressing crude prices.

Last year, the Malaysian economy posted a 6% growth, hitting its annual expansion target on the fourth year of its previous five-year plan. But in 2011-2013, actual economic expansion fell short of expectations. (Please see table below)

In the first quarter of the current year, the country’s economy expanded by 5.6, representing a slight deceleration from the 5.7% pace recorded in the three months ending December 2014.

Analysts expect Malaysia’s economy to expand at a slower rate this year as overall growth momentum could be curtailed by weak export markets, low commodity prices and currency weakness.

“While the growth target is in line with Malaysia’s underlying growth fundamentals, one needs to consider the fact that some of her key trading partners are undergoing their own domestic reforms,” said Singapore-based DBS Group Research.

A weakening growth momentum in key markets such as Singapore and China poses downside risks to Malaysia’s economy, as well as its fiscal and trade balances, according to DBS.

While developments such as RAPID and PIPC will potentially boost economic growth in the medium-term, the Malaysian economy is expected to slow down this year, according to analysts.

Moody’s Investors Service expects Malaysia’s economic growth to slow down to 4.8% in 2015, with current account surplus narrowing to 3.7% GDP from 4.6% in 2014. The country’s fiscal deficit as a percentage of GDP is expected to decline to 3.2% from 3.5% last year.

“These assumptions point to a soft landing in the Malaysian economy,” the ratings firm said.

External risks will persist because of weak energy prices and the likelihood of monetary tightening in the US, but are manageable, Moody’s said.

“Such an environment is likely to hurt revenues for the sovereign and energy major, Petroliam Nasional Berhad (PETRONAS) this year and next,” it said.

Moody’s also expects private consumption growth in the country to weaken in the coming quarters with the implementation of a 6% goods and services tax (GST) in April 2015.

($1 = M$3.65)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections