• The government announced that electricity tariff in Peninsular Malaysia will be revised lower by an average rate of 2.25 sen/kWh or 5.8% from 1 March to 30 June.
• For Sabah and Labuan, electricity tariff will decrease by 1.20 sen/kWh (-3.5%).
• All users (household, commercial & industry) who consume less than 300kWh/month will not be affected by the tariff cut.
• The government said it remains committed to no electricity tariff upward review this year. Any further downward adjustment would depend on Tenaga’s fuel and generation costs. Comments
• The direct impact of the tariff cut on the CPI is expected to be minimal. Our calculation shows that the CPI growth will only be lower by at most by 0.1ppt due to the following: − 71% of households are not affected (Figure #1). − Based on a weighted average basis, effective tariff cut for households is only 1.3% instead of 5.8%. − Sarawak, which accounts for 8.7% of Malaysia’s population, will not be affected by the tariff cut. − Electricity only accounts for 2.9% of the CPI basket.
• For the industrial and commercial sector, the tariff cut of 5.8% coupled with lower fuel pump prices have resulted in lower cost of doing business. However, given price stickiness and uncertainty of oil price trend, we are skeptical that businesses will begin to cut prices which will result in a deflationary effect.
• At this juncture, we maintain our headline inflation forecast for 2015 at 2.5% (2014: 3.2%). Our projection has already factored in (i) Brent oil price assumption of US$55/bbl, which will translate into lower average RON95 retail price of about RM1.85/litre (2014 average: RM2.15/litre); and (ii) 1ppt spike in the CPI growth upon implementation of GST in April.
• On growth outlook, the tariff reduction will result in RM727m being pass back to the broad economy. However, this amount is negligible (>0.1% of GDP) and hence we maintain our 2015 GDP growth forecast at 4.8%.
• In the absence of upside risk to inflation, abated financial imbalances, moderate domestic growth outlook and greater external uncertainties, we continue to believe BNM will stand pat, leaving its OPR unchanged at 3.25% until end-2015.
• On the fiscal position, the electricity tariff cut has no impact on the government finance as the government’s annual fuel subsidy is maintained at RM260m.

Source: Hong Leong Investment Bank Research - 12 Feb 2015