Oil Price Plunge Confounds Malaysia
International Herald Tribune
July 8, 1998
Thomas Fuller

Malaysia's ability to tap its considerable oil and natural-gas reserves for much-needed cash appeared to have evaporated Tuesday, when officials from Petroliam Nasional Bhd., the state petroleum company known as Petronas, announced that sales last year fell $2 billion.

In a conference room halfway up the world's tallest building — a newly opened $550-million structure that the company built as its headquarters — officials spoke of a "difficult and challenging year."

Increased production, they noted, did little to reverse the effects of a persistent decline in oil prices.

In terms of the local currency, the ringgit, the company's balance sheet is healthy: profits and sales both grew by at least 20 percent last year.

The figures were deceiving, however, because the ringgit declined 40 percent since the Asian financial crisis started a year ago.

Profits in dollar terms fell $200 million.

Put simply, Malaysia's cash cow is a lot thinner these days.

Like several other troubled East Asian countries, Malaysia recently decided that it would try to spend its way out of the current economic crisis — a radical shift from the International Monetary Fund-style austerity program it had embraced in the nine months after the onset of the economic crisis.

Altogether, the government plans to put 12 billion ringgit ($2.9 billion) into stalled infrastructure projects and social spending in an effort to keep the economy from shrinking.

Malaysia's deputy prime minister, Anwar Ibrahim, said Tuesday the government would speed up construction to try to avoid negative growth.

But he said the crisis would force the government to revise downward its projections of 2 to 3 percent growth.

The government's search for cash has taken it, perhaps not coincidentally, to the country's largest oil market — Japan. During a visit to Tokyo, Prime Minister Mahathir bin Mohamad asked for "financial assistance," according to a Japanese official.

The official said Japan had agreed to provide soft loans for specific infrastructure projects and was waiting for formal requests from the Malaysians. "From the Japanese point of view, the amount is not decided," the official said. "We have to negotiate on the projects we assist."

But other sources familiar with Mr. Mahathir's visit to Japan said the prime minister had requested loans totaling several billion dollars.

It was the first time that Malaysia sought large-scale financial assistance from Japan in more than five years.

Petronas, for its part, is by no means in financial trouble. The oil company is highly respected among industry analysts and has extended its business throughout Asia, Africa and the Middle East.

But like oil industry players around the world, the company has been squeezed by the decline of oil prices. Even as Petronas officials spoke Tuesday, crude oil prices fell below $13 a barrel.

"It reduces the degree of freedom which the government has and which Petronas has in terms of the kinds of resources it may be able to call upon," said Jomo K.S., a professor of economics, commenting on the company's results.

Despite a difficult 1997, Petronas has fulfilled its traditional role: savior to troubled companies. In April, Petronas's shipping arm, Malaysia Inter national Shipping Corp., bought the shipping assets of the cash-strapped Konsortium Perkapalan, a company controlled by Prime Minister Mahathir's son, Mirzan.

Malaysia International Shipping paid $220 million for the assets and absorbed $311 million worth of debt in a deal that analysts said was fairly priced.

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