-  Malaysia is a net exporter of crude oil. This often leads to questions on how much the economy is driven by this commodity alone. Full-year average of world crude oil price was USD98 per barrel in 2013 while the YTD May 2014 average was USD100 per barrel. However, the International Monetary Fund (IMF) in its recent World Economic Update released last week warned of increased geopolitical risks which could lead to higher global oil prices.

-  In terms of trade, Malaysia’s net exports of crude oil amounted to RM9.8bil (or accounting for 13.8% of net trades) in 2013. On a YTD May 2014 basis, we gather that the overall net exports of crude oil amounted to RM2.5bil or constituted 6.1% of total trade balance.

-  Malaysia does not appear to be directing more of its resources into the mining sector. Similarly, overall net trade contribution to GDP has been declining over the years. In 2013, the mining sector accounted for only 8.1% of total real GDP while overall net trades contributed 7.1%. That compares to 2005 when the mining sector and net trades accounted for 13.3% and 22% of total GDP, respectively.

-  BNM’s price assumption for crude oil is USD105 per barrel for 2014. Meanwhile, the government envisages petro revenue to account for 12.6% (or RM28.3bil) of total revenue in 2014. In 2013, petroleum tax revenue contributed 14.3% (or RM30.5bil) to the total revenue in 2013. Hence, should global crude oil prices advance by 10%, Malaysia’s fiscal deficit is expected to narrow by 0.3ppt.

-  As for subsidies, we note that more than 50% of total subsidies are allocated for fuel subsidies in 2013. During 1Q14, total government spending on subsidies had amounted to RM9.1bil (or 22.5% of total budget allocation for subsidies in 2014). Assuming that 50% were allocated for fuel subsidies, total spending on fuel subsidies would have amounted to RM5.6bil in 1Q14.

-  We expect petrol pump prices to remain in check at least for this year while the government assesses the economic impact of further price reforms. Mainly, world crude oil price has been trending below BNM’s targeted price assumption of USD105 per barrel as at YTD, except for a few days in June. Elsewhere, the government is considering various options to counter the adverse impact of future subsidy cuts on the lower and middle income groups.

-  As for overall inflation, we note that the full-year inflation is expected to register at 2.8% given our base case assumption of no adjustment for petrol pump prices in 2014. Meanwhile, every 20 sen increase in petrol pump prices effective September 2014 will result in a 0.3ppt upside to our base case assumption for inflation. At the same time, the government is expected to save approximately RM1.1bil in 2014 if petrol pump prices increase by 20 sen effective September.

-  However, should the government introduce a targeted-based subsidy programme by September 2014, we do expect petrol pump prices to rise by more than 20 sen. Assuming that the government raises petrol pump prices by 30 sen per litre effective September, full-year inflation will rise to 3.3% in 2014. Meanwhile, government savings will increase to RM1.7bil in 2014. As a recap, a one-time petrol subsidy reduction of 20 sen per litre during the start of the year results in government savings of RM3.3bil per annum.

Source: AmeSecurities