- The government had announced a cut in petrol subsidy yesterday, effectively hiking the retail prices for RON95 petrol and diesel by 20 sen per litre from 2 October.

- The new retail price of RON95 petrol is RM2.30 per litre while diesel is priced at RM2.20 per litre. Currently, the market price for RON95 petrol is at RM2.58 per litre while the market price of diesel is at RM2.52 a litre.

- The government is trimming its fiscal deficit in stages. Owing to the cut in petrol subsidy, additional savings by the government will probably amount to RM0.83bil in 2014 (or 0.1% of GDP). Based on our full-year GDP growth assumption of 5.7% for 2014, the overall budget shortfall could come in lower at 3.3% of GDP (2013: -3.9% of GDP).

- Subsidy bills during 1H14 amounted to RM18.18bil (or +2.1% YoY). In part, higher spending on subsidies was attributable to the elevated crude oil price which averaged USD100.9 per barrel in 1H14 vs. USD94.9 per barrel in 1H13, and higher disbursement for cash assistance under BR1M to the low- and middle-income group.

- For the full year of 2014, the government has allocated a staggering RM40.4bil (or 18.0% of total revenue) for overall subsidies. However, that is a reduction of RM2.94bil from a year ago (or -6.8% YoY). The provision for fuel subsidies amounts to RM23.3bil (or 57.7% of total subsidies).

- The Domestic Trade, Cooperative and Consumerism Ministry said that the government is aware of the impact the subsidy cuts will have on the economy and the people and will be taking steps to lighten the burden.

- Among the financial aids will be an increase in the BR1M cash handouts to low-income households, which will be announced during the tabling of the 2015 Budget on 10 October.

- As for overall prices, the Consumer Price Index (CPI) registered a growth of 3.3% YoY in August, compared with 3.2% in July. During the month, core inflation grew by 3.3% YoY while the cost component of Food and Non-alcoholic Beverages had increased by 3.3% YoY.

- Headline inflation would probably register a moderated growth of 2.5% in September 2014 compared with +2.6% in the corresponding month last year. Owing to the higher base of last year, the transport index of CPI was likely to have moderated to +0.7% in September 2014 vs. +5.5% YoY in August 2014.

- Note that the transport index soared by 4.6% YoY in September 2013 when petrol pump prices were adjusted higher (August 2013: +0.6% YoY).

- On a YTD basis, inflation grew by 3.3% YoY as at end-August. That compares to the corresponding period of last year when inflation had advanced at a moderate pace of 1.7% YTD. The price increase as at YTD 2014 was mainly driven by the Food and Non-alcoholic Beverages (+3.6% YoY) and Transport (+5.4% YoY).

- Owing to the petrol pump price increase, the full-year inflation is likely to register a growth of 3.2% in 2014. Meanwhile, consumer prices are expected to escalate further next year, especially from April 2015 onwards when GST takes effect.

Source: AmeSecurities