This article first appeared in The Edge Malaysia Weekly on April 22, 2024 - April 28, 2024

MALAYSIA is “sticking” to plans to trim blanket petrol subsidies this year in favour of targeted aid to better cater for those who need the subsidies while bolstering investor confidence by reining in the government’s fiscal deficit, Economy Minister Rafizi Ramli is reported to have said.

Yet, until the finer details of how and when this will be carried out are announced, there is unease that rising oil prices might once again set back plans for subsidy rationalisation. “It would be harder for Malaysia to lift fuel subsidies amid an inflationary environment due to high cost of living concerns,” an observer says. 

Brent crude oil was hovering above US$89 per barrel at the time of writing on the back of mounting concerns over escalations in the Middle East turmoil.

“Economy Minister Rafizi reiterated that plans to cut fuel subsidies remain [intact]. We think what is tricky is the size and timing of the subsidy cuts as global oil prices push higher,” says Julia Goh, senior economist at UOB Bank Malaysia. She reckons that subsidy rationalisation will “become more critical in the scenario where oil prices spike”.

The average spot price for Brent crude oil was expected to rise from US$82.96 in 1Q2024 to US$89.97 in 2Q2024 and inch higher to US$91.34 in 3Q2024 before easing to US$89.67 in 4Q2024, according to the US 

Energy Information Administration (EIA) short-term energy outlook (STEO) report released on April 9, which had the annual 2024 average at US$88.55 versus US$82.41 in 2023, but expects prices to average at US$86.98 in 2025.

“If oil prices reach US$100 and stay elevated for an extended period, subsidy costs will escalate. Delaying the rollout of the implementation becomes costlier for the government. But the government is also cognizant of managing the effects of the subsidy cuts on inflation and cost of living. Hence, we don’t think they can accelerate the plans either as that would lead to a sharp rise in inflation. Thus, our view remains for a gradual increase in fuel prices as the more probable scenario,” Goh elaborates.

Hong Leong Investment Bank (HLIB) Research economist Felicia Ling, who thinks subsidy rationalisation will still happen this year, estimates that RON95 should be at about RM3.31 per litre (RM1.26 above the current RM2.05 pump price) while diesel should be around RM3.41 per litre (RM1.26 above the current RM2.15 pump price) based on average prices year to date.

“From our estimate, the government can achieve savings of RM29 billion to RM33 billion if it floats RON95 and diesel prices [depending on where global prices are],” she says.

As at April 15, RON95 pump price — which has remained unchanged at RM2.05 per litre (US$0.429) since 2021 in Malaysia — was the ninth cheapest in the world among 169 countries tracked by GlobalPetrolPrices.com. Even if RON95 were sold at the RM3.47 per litre (US$0.726) mark that RON97 fuel was priced at at the time of writing, Malaysia would still be at No 23 and the cheapest in Asia (ex-Brunei) (see table).

While the simplest method would be to float fuel prices to market levels for all consumers, with cash aid given to targeted groups identified using data from the Central Database Hub (Padu), Ling expects subsidy rationalisation for RON95 and diesel to “only happen gradually, accompanied by targeted assistance”.

Goh also does not expect the government to fully float fuel prices at one go “as the price shock would be too great and negative for the economy”. “The government has to walk a fine line with balanced responsibilities between the fiscal reform measures without causing a dent in growth.”

And just as Rafizi told Bloomberg on April 16 that “in order to achieve the fiscal [deficit] target of 4.3%, a certain timeline has to be abided”, Goh notes that “reaching the fiscal deficit target of 3.5% of GDP by 2025 and 3.0% in the medium term will be challenging” without sticking to fiscal reform measures that are part of the fiscal consolidation plan.

“It is key to the government’s plan to narrow the budget deficit to 4.3% of GDP. Recent comments by the Economy Minister suggest that they are determined to press on with fuel subsidy reforms,” says Christopher Wong, FX strategist at OCBC Bank in Singapore.

HLIB’s Ling says subsidy rationalisation is important for the nation “as it could improve Malaysia’s fiscal standing over the longer run, which would also lead to healthier economic fundamentals and improved investor perception of Malaysia. It also allows the government to rebalance its expenditure to ensure its allocation of resources is more balanced towards longer-term development goals, which can improve the country’s growth potential.”

Subsidies for petroleum products like RON95 and diesel form the bulk of Putrajaya’s subsidies and the social assistance bill that ballooned to US$81 billion last year.

Every 10% increase in RON95 and diesel prices would raise the Consumer Price Index (CPI) by 0.51 percentage point on a full-year basis; Ling and her colleagues wrote in a March 20 note that mentioned targeted subsidies should cushion the impact of fuel price increases on discretionary spending.

The note, which reminded that “subsidy rationalisation” is spelt out as of the 17 “big bolds” under the 12th Malaysia Plan (mid-term review), also said the federal government’s fiscal deficit could narrow to 2.8% of GDP from its target of 4.3% of GDP with RM29 billion savings from subsidy rationalisation. Malaysian pump prices for RON95 and diesel would still be the cheapest in Asean (ex-Brunei) even if RON95 and diesel prices went up by 64% and 61% respectively, it added.

“We note that the fiscal deficit target of -3.5% to -3% by next year as stipulated under the 12MP MTR is broadly similar to the range that was attained in 2015 to 2017 (-3.2% to -2.9%). However, it is important to note that this was when GST (Goods and Services Tax) was in place to help boost the government’s coffers. Thus, with GST unlikely to make a comeback anytime soon — largely due to the unfortunate politicising of the tax — the implementation of subsidy reforms has now become even more crucial if the 12MP MTR’s fiscal goal is to be achieved,” the HLIB note reads.

With Malaysia previously floating fuel prices only to back-pedal following political pressure, why is this time any different?

“We think it is different now because there are more push factors given the state of public finances post-pandemic that needs to be addressed while fuel subsidies would not be aligned with the country’s current energy transition plans,” Goh says.

Ling, meanwhile, reckons that much depends on the communication campaign for the plan for subsidy rationalisation and the mechanism of cash transfers. “I’m hopeful,” she adds.

A total of 10.85 million Malaysians had signed up for Padu by the March 31 registration deadline, according to official releases. This works out to 49.4% of the 21.97 million citizens aged 18 and above.

At 1.74 million registrations, Selangor leads in terms of the absolute number of Padu sign-ups while also having the lowest in terms of the percentage registered at only 41% of 4.24 million adults (aged 18 and above) compared with a median of 50.6% among 13 states and three federal territories (see chart below).

The percentage of adult registrations for Padu is the highest in Perlis at 63.2%, with Kelantan, Terengganu, Perak, Pahang, Kedah, Negeri Sembilan, Sabah, Melaka and Labuan having at least 50% adult registrations. There was a noticeable pickup in registrations nearer to the deadline, except in Sarawak, where registration still reached 1.97 million or 46.2% of adults.

Whatever one’s thoughts on Padu and the number of actual verified registrations, what is certain is that Putrajaya would have to foot a higher subsidy bill than what it had budgeted for if oil prices rise further and subsidy rationalisation is again pushed to the back burner.

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