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Mahathir's love affair with the
euro
By Arun Bhattacharjee
KUALA LUMPUR - Malaysian Prime Minister Mahathir
Mohamad is running for the euro like a horse with the
bit in its mouth. But hurdles are many, some within his
own Ministry of Finance. Another is the likely impact on
Malaysia's more than US$34 billion (the highest with any
country) trade with the United States.
Mahathir
suggested last month that Malaysia's crude oil and
natural gas should be traded in euros after an apparent
communication on the subject with Indonesia. Now that
Indonesia is not too keen to follow up the idea,
Mahathir would like to go it alone, although many in the
government are not too happy. Some of them feel that it
is possible to trade in two currencies. The reservations
by others are apparently related to the possible
political fallout, as of late the relationship between
Malaysia and the United States is not at its best and
some strain in relationship with Indonesia has also
surfaced very recently.
The big question is,
with only about a hundred days remaining until
Mahathir's self-imposed retirement as prime minister
after nearly 23 years, whether the bureaucrats and his
successor will be willing to run the risk.
"If
Dr Mahathir has made up his mind, he can get the idea on
track even before he retires," observed a European
diplomat. He said Malaysia has to do a long-term
economic and political impact assessment, as the
apparent 25 percent gain in trade benefits by switching
to the euro may affect other areas of trade. This would
also mean that those who are paying for Malaysian crude
and liquefied natural gas (LNG) in US dollars, such as
Japan and India, would have to pay more, and Malaysia
has to take Japanese sensitivity into account.
Informed sources reveal that simulated research
on the possible impact on the Malaysian economy in case
the US dollar slips started just after the war in Iraq.
In the post-Iraq environment, Malaysia's largest trading
company, Petronas, is estimated to have lost about $159
million in profit because of depreciated
dollars.
In the 2001-02 financial year ending
March 2002, Petroliam Nasional Berhad (Petronas),
Malaysia's national oil and gas company, saw $17.669
billion in sales, registered an annual growth of 8.5
percent and posted a net income of $3.832 billion or
11.7 percent in net income growth. The 2002-03 financial
figures are not yet out but are expected to show even
better growth and profit due to fast growth in Petronas'
forays abroad and because of new online gas and
petroleum production from Malaysia's own fields in
Sarawak.
Malaysia's desire to switch over to the
euro for trading in petroleum followed on a reported
Indonesian missive to sound Malaysia out on a switch to
the euro for petroleum and LNG trade. Malaysia's
agreement with Indonesia's government-owned Pertamina
provides for the purchase of 250 million standard cubic
feet (scf) of natural gas per day by Malaysia. Although
the agreement was signed in 2001, a partial switch to
the euro by either party would mean new adjustments in
prices.
Mahathir said last month that at the US
dollar exchange rate "we are earning 25 percent less".
"Whereas, if we are to trade using euro at the
same price converted from the dollars, we will gain if
the euro appreciates," he said. He told Petronas chief
executive officer Mohamed Hassan Marican, "If we had,
say in 2000, sold gas in euro at the exchange rate then,
with the appreciation of the currency today, we would
have made 25 percent more." Apparently Mahathir was able
to persuade the detractors to his proposal, as he used
the same argument, this time more strongly, last
Saturday at Malaysia's King's Birthday ceremony in front
of the diplomatic corps, his cabinet and invitees to the
occasion.
Government economists, as well as
those in the Malaysia's Institute of Economic Research,
are against a full switch to the euro for various
reasons. This would involve a long series of exercises
that may not be worthwhile with a fluctuating US dollar
and a yet-to-stabilize euro. Some of them feel the
cohesion within the European Monetary Union to make the
euro a strong currency is lacking, and fear that with
some of the European nations kept out of Iraq's
construction contracts, the euro's present strength may
not last. Government economists argue that the United
States will do everything to push the value of its
dollar upward, if not for no other reason, to save face.
Plagued by the continued economic downturn and
assaulted by severe acute respiratory syndrome (SARS),
Malaysia's lifeline appears to be the Petronas, which
towers over other Malaysian companies in revenues. A
holding company for Malaysia's oil and natural gas,
Petronas' more than 120 wholly or partially owned
subsidiaries are engaged in exploration, production,
refining and sales in 21 countries throughout Asia and
Africa. The company today has proven reserves of 18.8
billion barrels of oil equivalent, 82 percent of which
is natural gas.
Malaysia also has to see that
its foreign reserves of $35.5 billion and trade of
$13.78 billion do not depreciate when converted into
euros. Government sources are optimistic that the new
compensation package of RM7.3 billion ($1.92 billion)
spread over almost all sectors of the economy, and
spelled out in 90 "measures", are providing the basic
support to the economy, although the critics consider
the measures thinly spread. Business and industry were
expecting a $3 billion compensation package to turn
around the economy.
The "Package of New
Strategies", as it is being referred to, will result in
a loss of government revenue to the tune of RM800
million annually from tax exemptions, include a 100
percent exemption for 10 years for industries of Pioneer
Status. Coupled with a cut in the lending rate by 50
basis points from the current interest rate to 4.5
percent, and more support to the manufacturing and
services sectors, the new economic package is expected
to boost the sagging economy.
With a further
increase in palm-oil plantation area with an incentive
of another RM200 million and stress on agriculture
production to reduce the food import bill of more than
$1 billion, Malaysia expects to use oil - both petroleum
and gas and palm oil - as the lifeline to boost its
economy while reorganizing the domestic economic
infrastructure to sustain growth.
"Malaysia is
God's chosen country and as such was always been
protected from major crises," said Dr A Xavier, of Adiss
Consultants, a business-consultancy firm, adding: "First
we had tin and before that was exhausted, we developed
rubber, and next it was oil palm and before that
resource comes under pressure we found perhaps the
largest reserves of oil and gas."
It appears
that God's chosen country is likely to witness another
respite and may revive its pace unless the global
economy goes on a tailspin, and relations with its main
trade partner, the United States, do not deteriorate
further.
(Copyright 2003 Asia Times Online Co,
Ltd. All rights reserved. Please contact content@atimes.com for
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