News

The  government  decided  to  hike  RON95  and  diesel  pump prices  by  20  sen  per litre  to RM2.30/litre and RM2.20/litre respectively  effective  2 October.

After  the  fuel  price  hike,  the  government  still  incurs subsidy  of  RM0.28/litre  and  RM0.32/litre  respectively  for RON95  and diesel.

The  government  said  that  such  move  was  to  keep  its subsidy  rationalization  plan  to  ensure  that  the  country’s finance  remain strong.

The  government  also  said  financial  assistance  will  be provided  to lower-income  group  to alleviate  their burden.

Comments 

The  20  sen  fuel  price  hike  came  in  as  a  surprise  as  we had  earlier  expected  the  government  to  announce  the multi-tiered  subsidy  scheme  in  the  Budget  a  week  later. We believe that complexity of multi-tiered subsidy scheme has  prompted  the  government  to  introduce  a  plain 20 sen hike  in  the  interim  period  after  being  silent  for  about  one year (previous  fuel price hike on 3 Sep 2013).   

We  expect  the  CPI  growth  to  average  2.9% yoy in 4Q14, resuming  its  downward  trend  since  its  peak  in  1Q14  of 3.5%  yoy.  The  latest  episode  of  fuel  price  hike  will  not result  in  a  jump  in  the  CPI  growth  as  the  index  was already  higher  a  year  ago  due  to  a  similar  20  sen  hike which  took  effect  on  3  Sep  2013.  We  maintain  our  fullyear 2014 CPI growth  forecast at 3.2%.

However,  the  CPI  growth  for  Sep-14  will  show  a  one-off peculiar  dip  to ~2.5% yoy due to lapse of the 20 sen hike introduced  last year.

With  the  20  sen  fuel  price  hike,  we  see  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 t he Ministry of  Domestic Trade,  Cooperatives  and  Consumerism,  we  now  expect the new fuel  scheme to be rolled  out in early 2015.

Coupled  with  the  recent  weakening  of  crude  oil  price,  the government’s  fuel  subsidy  per  litre  is  now  as  low  as RM0.28-0.32/litre.  As  we  expect  crude  oil  price  to remain weak  in  the  near  term  (see  our  report entitled “weak ening of  crude  oil  price”  dated  23  Sep  2014),  the  government’s subsidy bill is expected to be well contained.

We  expect  part  of  the  savings  from  the  fuel  subsidy  cut (~RM3.3bn)  to  be  spent  in  the  form  of  higher  BR1M payment  of  ~RM150  for  2015  (additional  cost  of ~RM1.2bn).  

On  economic  growth,  the  20  sen  fuel  price  hike  is expected  to  be  slight  negative  on  consumer spending (via erosion  of  purchasing  power)  and  business  activity (higher  cost  that  cannot  be fully pass ed  on).  We maintain our  view  that  GDP  growth  would  moderate  to  5.6%  in 2H14  from 6.3% in 1H14  (full year forecast at 6.0%)

Backed  by  slower  domestic  financial  activities,  weaker economic  performance  in  developed  countries  (i.e. Eurozone  &  China)  and  waning  enthusiasm  on  property speculation,  we  expect  the  OPR  to  be  held  steady  at 3.25% in the upcoming MPC meeting on 6 Nov  2014. 3.25% in the upcoming MPC meeting on 6 Nov  2014.

Source: Hong Leong Investment Bank Research - 2 Oct 2014