By Samantha Joseph
Fuel prices are going up, and so are the 1 Malaysia People’s Aid (BR1M) handouts. In an effort to aid the embattled public finances, the government announced a 20 sen subsidy removal of RON95 petrol and diesel. The announcement came after the Fiscal Policy Meeting yesterday, effectively increasing the selling price of RON95 to RM2.10 and diesel to RM2.
Meanwhile, the budget for BR1M is expected to expand in the Budget 2014 announcements.
After a less-than-encouraging elections run, the current government will be striving to strike a balance between maintaining their stance of paramount concern for the rural folk, and proactively engaging the issue of rising public debt – especially after the widely-publicised Fitch report that highlighted the lack of budget reform and low income growth, among other things.
“The move by the government to rationalise the subsidies is a step in the right direction, given the current economic conditions. We have long been expecting these strategic policy reforms, which would raise competitiveness and improve its credit rating,” Alliance Research economist Manokaran Mottain observed.
The rationalisation is expected to save the government at least RM1.1 billion in 2013. The entire allocation for 2013 amounts to RM24.8 billion, or 11.9% of total revenue. In contrast, a report by AmResearch analyst Patricia Oh noted that fuel subsidies in 1990 amounted to RM27 million, or 0.1% of the total revenue.
“With the 20 sen subsidy reduction, the government now provides a 63 sen subsidy for a litre of RON95 and 80 sen for a litre of diesel,” said Oh.
Subsidy rationalisation is a necessary step in alleviating government debt, and in combination with the expected goods and services tax to be announced, should allow the government to achieve targets including fiscal revenue growth, and reduction of fiscal deficit.
“With the move, we believe that the Government may be able to achieve its target of reducing its operating expenditure by 0.3% this year,” a report by Kenanga Research said. “Assuming that total fiscal revenue would grow by at least 0.5% (official target: 0.7%) the total deficit may reach the official target of RM40 billion.
With the denominator or nominal GDP remained unchanged based on our real GDP growth target of 5% for the whole 2013, we reckon the 4% fiscal deficit target would likely be achieved.”
Following that, inflation is expected to rise on the back of the adjusted prices.
“In the immediate term, we may see Malaysia’s inflation rate shooting up towards 4%, due to the first round impact on transportation, food and energy prices,” said Mottain. “With an expected 2% inflation in August, inflation for September will likely jump to 3% and more.”
Oh reported that, on a year-to-date basis, inflation had increased by only 1.7%. Even if inflation spikes after the fuel hike, analysts expects the rise to be within full-year targets of 2.5%.
Analysts do not expect Bank Negara Malaysia (BNM) to review the overnight policy rate (OPR) due to inflation, as the numbers are still on track.
“Given that the rise in the CPI is mainly driven by the cost-push factors, there is no reason for BNM to opt for a rate hike this year,” Kenanga said. “Other factors that would support our view are the prevailing uncertainty in the global economy and the slowing momentum of the domestic growth recovery. It would also be unwise to hike rates when household debt level remains high.”
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