CEO Morning Brief

Diesel Subsidy Rationalisation a Step in the Right Direction, Economists Say

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Publish date: Tue, 11 Jun 2024, 10:32 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (June 10): The move by the government to implement the diesel subsidy rationalisation is a positive step in the right direction towards better fiscal management, despite potential backlash from the public, economists argue.

The Institute for Democracy and Economic Affairs (IDEAS) chief executive officer Tricia Yeoh said while fuel subsidy rationalisation has been mooted and considered for a long time including under previous administrations, none has been this bold and confident to actually implement them.

“It does send a positive sign that this government has the confidence and the momentum to embark on something that could be potentially unpopular. In no country has there been subsidy rationalisation in which it's popularly received by the masses,” she told The Edge.

Yeoh contended that the move will bode well for international ratings agencies’ view on Malaysia, as the savings from the subsidy rationalisation will eventually improve the country’s fiscal position, which will then reflect in better ratings.

Chief economist and social finance at Bank Muamalat Malaysia Bhd Dr Afzanizam Abdul Rashid concurred, saying that the move would boost the government’s credibility in respect to fiscal consolidation, despite it being an unpopular move for the public.

“In time, I believe the rakyat will appreciate [it] once they start to see the outcome. Perhaps, the most immediate outcome that they want to see is the coverage of the recipient of subsidies. If the recipient of the subsidies can be expanded from the present figure circa 30,000, it would help to alleviate the financial burden,” he told The Edge.

Finance Minister II Datuk Seri Amir Hamzah Azizan announced on Sunday that the government has set the pump price of diesel at all retail stations in Peninsular Malaysia at RM3.35 per litre, up RM1.20 from the previous blanket subsidised price, effective Monday.

He said this is the unsubsidised market price based on the May 2024 average, according to the automatic pricing mechanism formula. Moving forward, diesel prices will be announced on a weekly basis to be aligned with market price based on the formula.

According to Amir, the government is expected to save RM4 billion a year as a result of the implementation of the diesel subsidy rationalisation.

To mitigate the impact on domestic prices, selected sectors have been approved to purchase diesel at subsidised rates. The lowest would be for fishermen at RM1.65/litre, followed by RM1.88/litre for land public transport under the Subsidised Diesel Control System (SKDS) 1.0, and RM2.15/litre for eligible logistics vehicles via a fleet card mechanism under SKDS 2.0.

Separately, a monthly aid of RM200 will be given to eligible individuals, small farmers and smallholders, with non-luxury diesel-powered vehicles, under the Budi Madani cash assistance scheme. As pointed out by Dr Afzanizam, only 30,000 applications have been approved for this cash assistance.

The diesel subsidy rationalisation is part of the government’s aim to cut its “subsidies and social assistance” spend by RM11.5 billion as laid out in Budget 2024.

Maybank Investment Bank Bhd (Maybank IB) in a note on Monday pointed out that so far, a reduction of RM7.4 billion has already been announced, namely RM4 billion from targeted electricity subsidy, RM1.2 billion from chicken price subsidy removal, and RM2.2 billion from the targeted diesel subsidy, based on prorated calculations.

As such, only RM4.1 billion of savings is left to be announced.

“The rakyat will start to appreciate it when they start to see that basic infrastructure in schools, hospitals and others have started to improve as the government has more resources to be directed towards the critical sector. Once the outcome becomes tangible, it will boost the credibility of the government and there will be buy-in among the citizens,” Dr Afzanizam added.

Impact on inflation will be minimal

Given that diesel carries just 0.2% weight in overall consumer price index (CPI) basket — Malaysia's main gauge of inflation — the direct impact is likely to be minimal.

In fact, CIMB Investment Bank Bhd has revised its headline inflation forecast for 2024 downwards to 2.3%, from the initial 2.7%, due to the decreased weightage of fuel and lubricants in the CPI basket, which dropped from 8.5% in 2023 to 5.9% in 2024.

“Diesel’s share is 0.2%, implying that the 56% increase in diesel prices translated into a 0.1 percentage point first order impact to headline inflation over 12 months. Meanwhile, the CPI weight for petrol is 5.5%.

“The inflation hit [+0.1 percentage point] is contained by the continuation of subsidies for fishermen, land public transport, logistics vehicles and East Malaysia, as well as cash handouts to small traders and agriculture smallholders,” it said in a note on Monday.

While the indirect effect of the diesel price hike remains a concern, CGS International Securities Malaysia head of economics Nazmi Idrus argued that the implementation of the fleet card mechanism ensures that the related sectors continue to receive the subsidised fuel, thus limiting the price pass-through effect.

“The risk is on the implementation. Few logistics and transport companies that we have talked to mention issues such as long queues at pump stations, not enough fuel allocation in the card, and backlogs in application for the card. Some of these will lead to higher prices, and also businesses may take the opportunity to profiteer anyway especially for businesses with non-transparent pricing mechanisms,” he told The Edge.

Will RON95 be next?

Following the diesel subsidy rationalisation and the government’s continued efforts for reforms, the restructuring for the RON95 fuel may be next albeit it is still uncertain if it will be implemented before the end of the year.

Many of the economists The Edge spoke to alluded that the timing of RON95 subsidy cuts will depend on how the effects of diesel subsidy rationalisation will fare and the effectiveness of the targeted subsidy measures.

Maybank IB simulated that if the targeted RON95 petrol subsidy rationalisation starts on July 1, 2024 and with the goal of achieving RM4.1 billion in government savings within the second half of 2024, RON95 petrol price will need to be raised by 32 sen per litre (+15.6%). And if the targeted RON95 petrol subsidy starts on Oct 1, 2024 to achieve RM4.1 billion savings within the fourth quarter of 2024, RON95 petrol price will have to be increased by 65 sen per litre (+31.7%).

“When the targeted RON95 subsidy rationalisation will take place is ultimately a “political call”. Of course, the government has the final say on the actual quantum and timing of RON95 price adjustment. It can even postpone the implementation of targeted RON95 petrol subsidy rationalisation,” the investment bank noted.

For IDEAS’ Yeoh, she said that the RON95 subsidy rationalisation should be accompanied by a very strong communications plan from the government, in order to explain the reasons behind the move and what the additional savings will be utilised for.

“Ultimately there is a lot of anger because the public perceives that the government doesn't spend the public funds well anyway. There's a link here with the corruption and the abuse of power that causes the leakages from the system.

“So if the government can correct that narrative, and also show demonstrable efforts in how it's attempting to plug the gaps in other ways apart from the rationalisation, then it would be seen as more of a collective effort between the government and the public. I think if you package it that way — like it's a collective effort — then the public won’t feel as if they are the only ones who are sacrificing,” she added.

Source: TheEdge - 11 Jun 2024

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