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Malaysia's finance minister:  Ukraine war provides an opportunity to reduce debts

According to Malaysia's finance minister, rising oil prices caused by the war in Ukraine could help the country's balance sheet, giving it a breather as it recovers from the 1MDB scandal and the pandemic.

Although the Ukraine conflict will have a "very marginal" negative impact on Malaysia's economy, Zafrul Aziz expects the oil-producing country's deficit to shrink and its fiscal position to improve as commodity prices rise.

"The increase in commodity prices . . . will actually help Malaysia," Zafrul, a former banker who joined the Malaysian government in 2020, said. "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 reduce its national debt, which worsened following the embezzlement of billions of dollars from the state fund 1MDB in a scandal that engulfed then-Prime Minister Najib Razak in 2014.

The pandemic of the coronavirus exacerbated those debt problems. Malaysia's fiscal deficit reached 6.4 percent of GDP in 2021, more than double its pre-pandemic target, after the government unleashed billions of public funds to support the economy.

However, rising oil prices present an unexpected opportunity for an economy that, according to the government, generates a fifth of its GDP from oil and gas. Aziz stated that he expects the deficit to be reduced to 6% this year.

Investors have flocked to Malaysian stocks, indicating that the country's economy will benefit. During the Ukraine crisis, Malaysian stocks have outperformed global stocks, with the FTSE-Bursa Malaysia Kuala Lumpur Composite index up 4.6 percent since the beginning of February.

However, Zafrul pointed out that the benefit of higher oil prices would not fully compensate for the impact of the Ukraine crisis on global demand.

"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 explained. "That’s why we are assuming an impact of 20 basis points to the GDP."

In a high-profile case that has refocused attention on the 1MDB scandal, 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. However, the finance minister downplayed the controversy's long-term impact on Malaysia's economy.

"I know 1MDB is more an issue about the principle, the legality of it," Zafrul said. However, the outstanding debt, which Aziz estimated to be worth RM17 billion ($4 billion), was a tiny fraction of the total national debt.

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



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