Economists have often always expressed the need for Malaysia to move away from its dependence on oil revenues and look at alternate sources of wealth.
The need to do so has become more real now than before with the advent of renewables and the fact that oil is a depleting source of wealth. It won’t be long before Malaysia becomes a net importer of oil.
There is little that a small country like Malaysia can do to fix the price of Brent crude oil and thus it becomes vulnerable to the vagaries of the world economy and the instability around it.
Considering Malaysia’s dependence on a depleting source of wealth, it needs to ensure that strategies are put in place to broaden its earnings base well before the oil wells dry up.
Towards achieving this, Malaysia should consider the establishment of an oil sovereign fund, that would insulate the economy from sharp gyrations in the world economy but give policy planners a certain amount of certainty in achieving its well-laid-out economic plans.
While the timing in which the idea is mooted may not be right, considering the horrific connotations that would conjure in the minds of many after the IMDB debacle, any policy or plan is only as good as how well it is executed and must be accompanied with good intentions.
The clock is ticking and the need to broaden our earnings base and reduce our dependence on oil is urgent. Even countries in the middle east have already taken concrete measures to deal with the problem of over-dependence on oil.
The intended purpose of the fund is to ensure that we insulate ourselves against fluctuating earnings but ensure that the wealth from the oil is increased manyfold even after the depletion of our oil reserves.
In a recent interview with the Business Today, veteran UMNO leader and Former Finance Minister Tengku Razaliegh Hamzah said that idea was mooted a long time ago when the revenues from oil were high, but it is not too late even now “although we missed the boat”.
“Considering it’s a depleting source of wealth, we should try to conserve the wealth from oil through the sovereign fund,” he said. Malaysia’s total oil revenues is estimated at RM43.9 billion or about 18.8 % of the total revenues of RM234 billion in 2022.
The bounties that accrue to countries that have taken the trodden path are out there for all to see and Malaysia must take a leaf from this. A good role model to emulate is Norway’s sovereign wealth fund.
A portion of our oil and gas revenues can be transferred to the fund which will then be invested in equities, fixed income, and real estate. The funds can be used to invest either locally or abroad.
The Norway oil Fund invests in around 9,000 companies worldwide, entitling it to a small share of profits each year. In addition, the fund owns hundreds of buildings in some of the leading cities which generates rental incomes and a steady flow of income from lending to countries.
Today, Norway’s Oil Sovereign Fund has over US$1.3 trillion in assets, including 1.4% of global stocks and shares, making it the world’s largest sovereign wealth fund.
Malaysia too can follow this and ensure that we can provide sufficient safety nets and welfare for future generations. The aim of the fund is to ensure that we use this money responsibly, think long-term and so safeguard the future of the Malaysian economy.
The government can only spend an agreed percentage of it as part of the annual budget. Budget surpluses must be transferred to the fund, while deficits are covered with money from the fund. In other words, the authorities can spend more in hard times and less in good times.
If the sovereign fund was in place, we would have dealt with the economic hardships following the pandemic with relative ease without the need to borrow and although Malaysia should have done so a long time ago, it is not late.
Just like the Norwegian Fund, our policymakers must take a broader perspective that our national wealth lasts for as long as possible and that its investments have an extremely long-term perspective, enabling it to cope with big swings in value in the short term.
While Malaysia may have lost its opportunity of establishing the sovereign fund in the past, there is still an opportunity for it to so now.
