KUALA LUMPUR: CGS International's economists today said the time for subsidy rationalisation for RON95 fuel is now, given the strengthening of the ringgit and falling commodity prices.
"We think a window of opportunity has come for the government to implement the RON95 subsidy rationalisation." "The recent strengthening of the ringgit vs. the US dollar, as well as the drop in global oil prices, has led to a significant narrowing of the margin between subsidised retail fuel and the market price," it said in a note today.
"With the robust domestic economic growth and stable political conditions, we think that implementing RON95 subsidy reform now would be the least disruptive," the note said.
The report was written by economists Nazmi Idrus and Mas Aida Che Mansor.
CGS International believes RON95 adjustments can be done all at once, relative to the government's earlier plan to implement adjustments in several tranches.
As of Sep 11, 2024, the market price for RON95 stood at RM2.46/litre, which is only 41 sen higher than the regulated price of RM2.05/litre.
"This is the narrowest price difference since December 2021 amid the global postpandemic reopening. In the past, manual adjustments to fuel price ranged from around 10 sen to 60 sen, hence, we think it is possible to adjust only once," it said.
The firm said the muted impact of diesel price adjustment, adds support for further fuel reform.
On June 10, 2024, retail price for diesel fuel was raised to RM3.35/litre, up from RM2.15 previously, marking a nearly 60 per cent increase.
It said, even though concerns over higher inflation ensued, consumer price index (CPI) data for June 2024 and July 2024 indicated very limited effect on consumers.
It said part of the reason likely stemmed from the government's ardent price monitoring, which limited opportunistic pricing.
CGS International estimates that total fuel subsidy spending at RM26.3 billion in 2024, with RON95 subsidy forming RM16.3 billion.
It said a fully floating RON95 price could save the government a quarter of the cost, or c.RM4.1 billion.
Its estimates show that the amount could lower the fiscal deficit in 2024 by as much as 0.2 per cent of gross domestic product, assuming there are no offsetting measures.
It said a RON95 price increase by 40 sen on Oct 1, 2024 would add 100 basis points to CPI growth (from 2.0 per cent to 3.0 per cent year-on-year).
"Inflation for 2024F could still be mild at 2.1 per cent yoy, but a more noticeable increase could be expected in 2025F at 2.5 per cent," it said.
CGS Internatioonal argued however that the impact on consumption is ambiguous depending on the offsetting measures.
"We believe targeted cash handouts are likely to be used, guided by information from the Central Database Hub (PADU). However, the low take-up from the diesel's Budi Madani programme could signal possible limited reach unless the government comes up with lax requirements this time," it said.
CGS International said they think a major holdback for the government is whether the fall in global oil prices and the strength in ringgit are consistent enough to avoid any policy backtracking. It said thus far, market expectation for Brent oil is generally bearish, with the forward curve in backwardation YTD (futures prices are lower than spot price). "That said, the elements that drive the falling oil prices also weaken global economic sentiment, which could affect Malaysia's economic prospects and put any measures that are inflationary out of favour."
"Nevertheless, we think there is no better time than now for the fuel reforms. Fuel subsidy presents a stumbling block for Malaysia's green initiatives, and the sooner this is done, the better," CGS International said.