• The government proposed fuel subsidies for cars below 1,500cc and motorcycles below 125cc, of at least 30sen/litre and capped at 100 litres/month and 40 litres/month for cars and motorcycles respectively.

• The subsidy, scheduled for the second quarter of 2019, would cost RM2bil and benefit 4mil car owners and 2.6mil motorcycle owners. For the rest, the RON95 will be floated again from the current price of RM2.20/litre.

• We emphasized that the subsidy earns a cost saving of at least RM30/month or 3% of the cost of owning a typical car of the relevant size. This is based on the RM900 in monthly cost to own and maintain a Perodua Myvi, as mentioned by the finance minister.

• The government’s priority is to reduce the cost of living for the most vulnerable groups by freeing up more disposable income. The budget aims to provide targeted support for lowincome and middle-class earners.

• There was immediate concern from the public that the subsidy would include owners of small luxury cars (the 1.3L Mercedes-Benz A 200 and 1.5L C200, 1.4L Audi A3 and A4, 1.5L Mini Cooper Clubman and Countryman, 1.4L Volkswagen Tiguan, 1.5 BMW 118i and 1.5L 318i) and exclude a number of comparatively cheaper Proton cars (the 1.6L Preve, 1.6L Suprima and upcoming 1.8L X70).

• The fear is that the subsidy will be abused by higher-income earners as a result of a blind implementation which only considers the car’s engine size. The government was quick to provide assurance: Finance Minister Lim Guan Eng said luxury car owners should not be covered, while Domestic Trade and Consumer Affairs Minister Datuk Saifuddin Nasution said the subsidy would be eligible to car owners who meet several criteria that include their income, along with the vehicle’s age and horsepower. This ostensibly means the subsidy will be sharpened to better target certain groups by more clearly delineating the income levels especially.

• The government encouraged the public to scrutinize the initial idea and said it would be “fine-tuning” the mechanism within the next four months. We believe the clear goal is to sharpen the mechanism of the subsidy to better target the groups it intends to help.

• The Star reported that the government had twice initiated an attempt to provide targeted fuel subsidies that relied on identity cards (ICs). The first was a pilot project in 2008 under former Prime Minister Tun Abdullah Ahmad Badawi that did not pan out, and another was a smaller-scale project for several low-income families in Kampung Sungai Kayu Ara, Petaling Jaya.

• We had emphasized on Friday that the subsidy would not result in a massive swing towards cars of below 1.5L given the minimal savings obtainable. The monthly savings of at least RM30 roughly translates to savings of 10-13% of the average fuel costs for cars such as the Perodua Axia, Proton Saga and Toyota Vios.

• That said, Perodua has the highest concentration of cars size as its entire fleet is below 1.5L. We believe the pressure to limit the subsidy to the most needy groups further accentuates the point that it is meant to help the most vulnerable groups instead of having a wider impact on the automotive sector.

Source: AmInvest Research - 5 Nov 2018