Malaysia's petrol price hike when global crude oil prices declined to 3 years low, a reflection of poor financial management!

Timing of latest fuel subsidy cut a surprise

PETALING JAYA - The latest round of fuel subsidy rationalisation came as a surprise to researchers and analysts who, nevertheless, are positive on the implications of the move, which could translate into savings of an estimated RM1 billion for the government.

Effective today, retail prices of RON95 petrol and diesel are up 20 sen each to RM2.30 per litre and RM2.20 per litre, respectively. This translates into a 9.5% increase for RON95 and 10% for diesel.

"We estimate that this fuel subsidy cut will save the government around RM1.1 billion in 2014, thus helping to achieve fiscal deficit target of 3% by 2015 and a balanced budget by 2020," AllianceDBS Research economist Manokaran Mottain said in a note today.

Currently, the market price for RON95 is RM2.58 per litre and for diesel RM2.52 a litre.

Manokaran said the move to cut the fuel subsidy further came as a surprise ahead of the tabling of Budget 2015 on Oct 10 and amid the recent decline in global crude oil prices.

"Following the recent announcement of a delay in the introduction of a multi-tiered mechanism for fuel, we had expected something like this to come on Budget Day," he said.

Manokaran said the reduction in fuel subsidy was necessary as the government had committed to bringing down the budget deficit to gross domestic product ratio from an estimated 3.5% this year to 3% in 2015, and to achieve a balanced budget by 2020.

However, in light of the latest fuel subsidy cut, Manokaran is now expecting a delay in the announcement of a multi-tiered pricing mechanism.

"We maintain our view that the current blanket subsidy mechanism has to be changed to a multi-tiered subsidy structure based on household income level.

"This is to ensure that subsidies are only channelled to the lower-income group. We hope that the government will have strong willpower to initiate the fuel subsidy reforms soon in order to ensure the economy is more competitive," he said.

Manokaran expects inflation to spike again in the last quarter of this year following the hike in fuel prices. "We maintain our view that 2014 full-year inflation will be 3.5% and inflation to hit 4% in 2015 on the back of the Goods and Services Tax implementation," he said.

Meanwhile, HongLeong Investment Bank Research said that with the 20 sen fuel price increase, it sees no rush for the government to implement the multi-tiered subsidy scheme, which has high complexity in implementation.

"In line with the latest comments by the Ministry of Domestic Trade, Cooperatives and Consumerism, we now expect the new fuel scheme to be rolled out in early 2015," its economist Sia Ket Ee said.

Coupled with the recent weakening of crude oil prices, he said, the government's fuel subsidy per litre is now as low as 28 sen to 32 sen per litre.

"As we expect crude oil prices to remain weak in the near term, the government's subsidy bill is expected to be well contained," Sia said.

He said savings from the subsidy cuts will likely be channelled to other economic services and social spending, expecting an additional RM150 in BR1M payment for 2015, or an extra RM1.2 billion.

The BR1M payout announced in Budget 2014 was RM650 for households and RM300 for singles. A BR1M payment of RM450 was also given to households with a monthly income of between RM3,000 and RM4,000.

RHB Research said the hike in fuel prices will likely hurt consumer and business spending somewhat but it will likely be manageable.

It expects inflation pressure to hold up in the fourth quarter following the fuel prices hike today, which will spill-over into other end-product and service prices gradually.

"Given that the weights for petrol and diesel account for about 7.5% and 0.2% respectively of the Consumer Price Index, the hikes in retail petrol and diesel prices are expected to add 0.7 percentage point to the inflation rate in October.

"However, the impact on inflation will likely be more muted due to the higher base effect in the 4Q of 2013," it said.

In light of the fuel price hike, RHB Research now expects inflation to come in at the higher end of its forecast of 3% to 3.4% in 2014, compared with 2.1% in 2013.

While inflation is expected to hold up in the fourth quarter due to the higher fuel prices, it opined that the country will likely experience a more moderate pace of economic growth in the second half of this year. -Sundaily

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Time for crucial fiscal reforms: Malaysia Budget 2014

Analysts expect Budget 2014 to address deficit concerns 

 Citi researchs ays there is a high probability that GST implementation will be announced in the budget.

THE long queues at petrol stations on Monday night was a precursor of things to come. Motorists waited patiently for their turn to fill their petrol tanks just before the price of RON 95 and diesel jumped 20 sen a litre at midnight.

It was a scene played out a number of times over the years when petrol prices at the pump were increased as energy subsidies were cut.

This time around, the decision to trim the fuel subsidy was just part of a greater scheme.

It was the first salvo in the Government’s effort to bring down the fiscal deficit and eyes are now squarely on just what more needs to be done to whittle the deficit to 3% by 2015 and a balanced budget by 2020.

On the cards is the continued rationalisation of subsidies and the sequencing of big ticket projects to lessen the import bill that has squeezed the current account surplus in the second quarter.

Moody’s Investors Service, in its assessment of the move to hike the price of fuel, says it represents a credit positive step in the Government’s larger fiscal consolidation plan but it is waiting for details of which are to be unveiled in the October budget speech.

The cut in petrol subsidies will result in savings of RM1.1bil and RM3.3bil for 2014. Analysts are divided whether that will be enough for the Government to meet its deficit target of 4% this year as there are still large expenditure transfers. “We currently forecast the deficit at more than 4% of gross domestic product (GDP) and the lack of additional reforms would place the Government’s fiscal targets increasingly out of reach,” says Moody’s.

The need to maintain such transfers such as the 1Malaysia People’s Aid is to ease the burden on the low-income and vulnerable groups as subsidies get rationalised. The continuation of such expenditures also allows for targeted subsidies to low-income households.

The Government is also looking at a comprehensive social safety net and further fiscal measures would also be introduced. It is expected that more fiscal tightening measures will be introduced during the budget.

There was, however, a knee-jerk reaction to the cut in fuel subsidies. The ringgit bounced back from its slide against the US dollar but analysts say any sustainable climb will depend on what the market sees from further fiscal reform measures.

More than reducing subsidies 

The timing of announcing the outline of its fiscal reform measures and the first cut in fuel subsidies was in response to worries by the rating agencies of the fiscal debt situation in Malaysia.

“Faced with the risk of a sovereign ratings downgrade and investors’ focus on the domestic and external sectors’ vulnerabilities at a time of a retrenchment of foreign capital, it is crucial that Malaysia fine tunes its macroeconomic policy mix for growth and financial stability over the medium term,” says CIMB Research chief economist Lee Heng Guie.

He feels that a fundamental review is also required to weed out the country’s non-developmental, low priority and unproductive expenditure, while focusing on growth-oriented spending.

“The problem of overlapping spending schemes has to be avoided. More cost-saving initiatives, including a critical review and reform of the procurement system to combat wastages and leakages must be implemented.

“A fiscal consolidation strategy should be accompanied by better fiscal and financial control over public-private partnerships and state-owned enterprises, aimed at putting the gross public debt-to-GDP ratio as well as contingent liabilities (loans guaranteed by the federal government) on a firm downward trajectory in the medium-term,” he says.

GST and RPGT

It is widely expected that a schedule for implementing a Goods and Services tax will be revealed when the budget is announced in October.

Citi research, in a note, thinks there is a high probability that GST implementation will be announced in the budget. “We doubt the Government will tempt the wrath of ratings agencies after raising hopes last week with such talk,” it said.

Reports have quoted Tan Sri Irwan Serigar Abdullah, the secretary general of the Finance Ministry, as saying that if the GST is announced during the upcoming budget for implementation in 2015, the rate will likely be between 4% and 4.5%.

For one, the GST itself will mean more taxes as the Government is expected to generate more revenue from its introduction. One economist also adds that a lot of businesses are also in favour of a GST because of the billions of ringgit it stands to gain from an imput tax rebate.

He says that analysis has shown expenditure will also rise because of GST and therefore, targeted social welfare programmes for the low-income earners will be needed once GST is implemented.

The other tax that will likely see a hike is the real property gains tax (RPGT). A higher RPGT, together with possibility higher stamp duty charges for higher priced properties, should increase government revenue. But one big motive behind hiking the RPGT, and possible raising the floor price on properties eligible for purchase by foreigners, is to cool down the property sector and stem the rapid rise in property prices.

Property prices are generally considered to be unaffordable for a growing segment of the population.

Impact on the economy

Fiscal reforms will mean cutting down expenditure and some economists are expecting economy to feel the impact from slower government expenses.

“We cut our 2013 GDP growth forecast to 4.4% from 5% earlier and 2014 estimate to 5% from 5.2% earlier – both of these numbers are now below the consensus expectations,” says Credit Suisse in a report.

“This downgrade reflects headwinds against private consumption from higher fuel prices and likely delays of some infrastructure projects hitting investment.” With the budget projected to be less expansionary, some are suggesting that the Government will look at ways to boost exports and drive investments as a means to compensate for slower spending.

“It is left to be seen if there will be a cut in corporate taxes and whether that will be enough to drive investments. As it stands, a lot of companies have a lot of cash in their balance sheet and it will have to be a big cut to get them to start putting that money to work,” says an economist.

“If that done, then there will be a big gap between corporate and personal income taxes.”

- Contributed by   By JAGDEV SINGH SIDHU  jagdev@thestar.com.my