CEO Morning Brief

Economists: Govt's Fiscal Consolidation Efforts Have Not Led to Sharp Increase in General Prices So Far

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Publish date: Tue, 24 Sep 2024, 09:31 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (Sept 23): Fiscal consolidation efforts by the Malaysian government, such as diesel subsidy rationalisation, tariff hikes and an increase in the sales and services tax (SST) rate, have not led to a sharp spike in general prices so far, as reflected by the easing of headline inflation in August, economists observed.

The increase in the consumer price index — Malaysia’s main gauge of inflation — unexpectedly eased to 1.9% year-on-year (y-o-y) in August, after staying at 2% for the past three months, undershooting the Bloomberg consensus estimate of 2%.

For the first eight months of the year, headline inflation came in at 1.8%. While most economists maintained their full-year inflation forecasts in the 2.0%-2.3% range — versus 2.5% in 2023 — CIMB Investment Bank on Monday revised down its inflation forecast for 2024 from 2.3% to 1.9%.

"We expect the inflation rate to stay benign in the coming months, as ringgit appreciation and moderating global crude oil prices alleviate imported cost pressures on businesses and mitigate the impact of the lower base effect," the investment bank wrote in an economics review note.

The retail price of diesel in Peninsular Malaysia — which was floated on June 10 — has been subject to several rounds of downward adjustment since early August, by a cumulative of 40 sen per litre to RM2.95 per litre currently, in the weekly review of retail fuel prices.

Similarly, the price of RON97 petrol, which was floated on Aug 29, has seen a cumulative decline of 28 sen per litre to RM3.19 per litre currently.

With falling global fuel prices, CIMB estimated that the subsidy for RON95 petrol has decreased from RM1.10 per litre as of the end of June to around 70 sen per litre currently, significantly alleviating the pressure on the government's budget.

"The development buys some time for the government, which aims to utilise the Padu database for [the] targeted RON95 subsidy mechanism to mitigate the impact on the vulnerable segments and minimise the risk of policy reversal," the house added.

Food inflation eased to three-year low

MIDF Research in a separate note on Monday highlighted that food inflation in August eased further y-o-y to a three-year low of 1.6%, from 1.7% in July, as global food prices declined further for the 21st consecutive month.

Subsequently, domestic food price inflation remained subdued in the first eight months of the year, averaging at 1.8% y-o-y, compared with 4.8% during the same period in 2023. This, as pointed out by MIDF, is significantly lower than the pre-pandemic average of 3.2% per annum and the post-pandemic average of 4.1% per annum.

"Nonetheless, as a net food importer, Malaysia remains particularly susceptible to external factors (changes in global food prices) and fluctuations in ringgit exchange rates.

"On a positive note, the strengthening of [the] ringgit recently to a certain extent would limit pressures from higher import costs," the research firm said.

Inflation risks delayed to 2025

Looking ahead, RHB Investment Bank opined that the inflation trajectory will depend on the timing and extent of RON95 subsidy rationalisation, demand-driven factors given Malaysia’s strong economic growth numbers, and fluctuations in global commodity and food prices.

Subsidy rationalisation for RON95 petrol might be delayed until the end of 2024 "at the earliest", the investment bank said in a note, limiting its potential impact on the headline inflation trajectory for the year.

Even when it is introduced, RHB sees that RON95 subsidy retargeting might take the form of a more gradual and measured approach, "given its substantial impact on the inflation trajectory and potential dampening effect on consumer spending".

Echoing MIDF's sentiment, RHB warned that higher commodity prices, especially food, base metal and energy prices, are still possible into the rest of 2024.

"Several factors could elevate commodity prices, specifically stronger demand conditions, as lower global interest rates inject positive spillover effects into manufacturing activities. Black-swan events such as intensified geopolitical tensions, and/or unexpected oil supply cuts by oil-producing economies, may also lift energy prices," it said.

Besides RON95 subsidy rationalisation, the UOB Global Economics & Markets Research team noted that other subsidised items that are also on the radar screen include local white rice, sugar and cooking oil.

Subsidy cuts aside, the effects of pre-announced pay hikes for civil servants and upward adjustments to pensions for retirees in December 2024 also bear watching, according to UOB, as they may lead to demand-driven factors that would push inflation up.

"Following the announcement, all ministries have also been directed to intensify monitoring at various levels to prevent any increase in prices of goods," the house said.

"However, if these risks do not materialise in the coming months while global oil prices retreat further, there are downside risks to our inflation forecast for this year," UOB added, maintaining its 2024 full-year average inflation forecast of 2.0% for now — against Bank Negara Malaysia's estimate of 2.0%-3.0% — while awaiting the announcement of further subsidy rationalisation measures by the government.

On this, CIMB said Budget 2025, scheduled to be tabled on Oct 18, may offer some clues about subsequent subsidy rationalisation plans for various items, including the extension of targeted diesel subsidies to East Malaysia, RON95 petrol subsidy rationalisation, and a new sugar price mechanism, among others.

Source: TheEdge - 24 Sep 2024

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