Resuming its trend. After a long delay due to unforeseen reasons, the Government has resumed its plan to hike fuel prices as part of its subsidy rationalization policy that was announced in July 2010. It has raised the price of regulated RON 95 petrol and diesel by 20 sen to RM2.10/litre and RM2.00/litre respectively effective midnight 3rd of Sept. The last price adjustment was made in May, with RON 97 – which works on a managed float – having its retail price cut by 20 sen to RM2.70/litre. As for RON 95, the RM1.90 price has remained in place since December 2010 after it was raised by five sen.

Expected. The intent to raise the price of RON 95 and diesel is expected especially after the General Election (GE) is out of the way. We had initially expected the fuel hike to start in the 4Q13. However, the speedier decision may have been largely influenced by mounting pressure due to recent warning of sovereign bond downgrade by rating agency Fitch along with factors like large outflow of foreign capital as the US Fed plans to taper its quantitative easing this month. Plus even as early as May 2011, the government had already stated that there were plans to review the pricing, and that there was no guarantee that petrol prices would stay the same forever, since the government was being burdened with subsidies for petroleum products. The price of both benchmark Brent and US WTI has remained elevated at US$114.36 and US$104.86 a barrel respectively (Monday, 2 Sep) due to tensions in the Middle-East and supply concerns of some OPEC member countries.

To ease fiscal burden. Prime Minister Datuk Seri Najib Abdul Razak said that the fuel hike would save the Government at least RM1.1b, adding that the government has allocated a total of RM24.8b this year on fuel subsidies. He said the government will save RM3.3b while still subsidising 63 sen per litre for RON95 and 80 sen per litre for diesel. In order to reduce the burden of the increase on the public, Najib said the Bantuan Rakyat 1Malaysia (BR1M) payouts will be increased this year. With the move, we believe that the Government may be able to achieve its target of reducing its operating expenditure by 0.3% this year. Assuming that total fiscal revenue would grow by at least 0.5% (Official target: 0.7%) the total deficit may reach the official target of RM40.0b. With the denominator or nominal GDP remained unchanged based on our real GDP growth target of 5.0% for the whole 2013, we reckon the 4.0% fiscal deficit target would likely be achieved.

The first step. The fuel hike is just the first of other important measures to address Malaysia’s structural macro issues. Among other moves being hinted at are the implementation of the goods and services tax (GST), and reforms in the electricity tariffs. Of more importance is the former, which has been delayed since 2007. We expect that the Government would focus on the GST in the Budget 2013 on 25th of Oct, meaning that the possibility that it might be introduce in 2014 is highly likely.

Rising prices. Obviously, the impact of the fuel and the anticipated electricity tariff hike would largely be channeled through consumer goods namely food and transport costs. This would translate into higher headline CPI. Hence, we are revising our average CPI growth for this year to 2.5% from 2.1%. On the expectation that the Government would introduce the GST next year and the possibility of another fuel hike at least once in the next six to 12 months, our preliminary projection suggest that the average CPI would likely exceed 3.0% by end of next year.

Monetary policy outlook. Given that the rise in the CPI is mainly driven by the cost-push factors, there is no reason for BNM to opt for a rate hike this year. Other factors that would support our view are the prevailing uncertainty in the global economy and the slowing momentum of the domestic growth recovery. It would also be unwise to hike rates when household debt level remains high. Hence, we maintain that the OPR would stay at 3.0% till year end. There is a possibility that BNM may raise interest rates next year if growth improves and the CPI exceeds 3.5% on the back of the impact of the possible implementation of GST and the continuity of subsidy rationalization.

Source: Kenanga