Ukraine war offers Malaysia a chance to reduce debts, says finance minister

Soaring oil prices caused by the war in Ukraine could improve Malaysia’s balance sheet, according to its finance minister, providing a respite for the south-east Asian nation as it tries to recover from the 1MDB scandal and the pandemic.

Zafrul Aziz said that although the Ukraine conflict would have a “very marginal” negative impact on Malaysia’s economy, he still expected to reduce the oil-producing country’s deficit and improve its fiscal position as commodity prices multiply.

“The increase in commodity prices . . . will actually help Malaysia,” said Zafrul, a former banker who joined the Malaysian administration in 2020. “We assume an oil price around $66 per barrel in our budget. But obviously today’s is much higher than that, so then there’s a potential upside in terms of our fiscal position.”

Malaysia has struggled for years to curb national debt levels, which worsened after billions of dollars were embezzled from the state fund 1MDB in a scandal that engulfed then prime minister Najib Razak in 2014.

The coronavirus pandemic aggravated those debt problems. After the government unleashed billions of public funds to support the economy, Malaysia’s fiscal deficit hit 6.4 per cent of gross domestic product in 2021, double its pre-pandemic target.

But rising oil prices present an unexpected opportunity for an economy that generates a fifth of its GDP from oil and gas, according to the government. Aziz said he expected to cut the deficit to 6 per cent this year.

In a sign of the anticipated boost to Malaysian businesses, investors have piled into the country’s stocks. Malaysian equities have outperformed global shares during the Ukraine crisis, with the FTSE-Bursa Malaysia Kuala Lumpur Composite index up 4.6 per cent since the start of February.

But Zafrul pointed out that the benefit from higher oil prices would not completely compensate for the effect on global demand during the Ukraine crisis.

“We are part of the global supply chain and hence the political and financial stability of our trading and [foreign investment] partners could impact Malaysia’s economy,” he said. “That’s why we are assuming an impact of 20 basis points to the GDP.”

Zafrul spoke to the Financial Times on the same day that former Goldman Sachs banker Roger Ng was convicted by a US jury in connection with the 1MDB embezzlement, in a high-profile case that has refocused attention on the scandal. But the finance minister also dismissed the long-term impact of the controversy on Malaysia’s economy.

“I know 1MDB is more an issue about the principle, the legality of it,” said Zafrul. But the amount outstanding to be repaid, which Aziz said stood at RM17bn ($4bn), was “a tiny amount” of the overall national debt.

He pointed to the victory of Barisan Nasional, a political coalition linked to Najib, in two state polls since November. “If 1MDB is such a big issue, they would not have won a two-thirds majority in two states,” added Zafrul. “People obviously want to move on.”

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