Slippery slope

Malaysia's hefty oil dividend is unsustainable

Oil dividends are an unreliable crutch for Malaysia. State-owned Petronas is doing everything it can to maintain its payout despite the slump in oil prices. The country's troubled government depends on the energy giant for one third of its federal revenue. The danger is that short-term political pressure undermines future profitability.

The falling oil price and lower volumes almost halved Petronas' net profit to 11.1 billion ringgit ($2.7 billion) in the second quarter. The unlisted group warned it would have to draw on cash reserves and take more austerity measures in order to meet capital spending plans while also fulfilling its commitment to pay the government 26 billion ringgit this year.
 
Petronas' dividend has been the most reliable pillar of the company's contribution to government coffers, which added up to around 68 billion ringgit last year. While taxes and royalty payments tend to fluctuate, the dividend has mostly risen.

That distribution doesn't look sustainable, especially if oil prices continue to decline from the current level of about $48 per barrel of Brent crude. Petronas' cash flow from operating activities fell 30 per cent in the six months to June to less than 35 billion ringgit. The company has said capital expenditure will be around 70 billion ringgit this year. That means Petronas will have to dip into its reserves to finance the dividend, which could be almost 60 per cent of net profit this year, the highest level since 2011.

With 71 billion ringgit of net cash on its balance sheet, Petronas can afford to live beyond its means for a while. But the worry is that political factors are taking precedence.

Prime Minister Najib Razak is fighting for political survival amid allegations of graft. A deteriorating economy provides extra ammunition for his opponents. The ringgit is already at its lowest level in 17 years and the fiscal deficit is more than three per cent of gross domestic product. The government may balk at the thought of giving up a big chunk of its revenue. But short-term policies will only make Petronas' payout less reliable in the future.