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KUALA LUMPUR: The slide in commodity prices, led by oil, will lead to a redistribution of income towards net importers, primarily Asian countries, and will result in direct fiscal savings that will impact Malaysia the most, said Citi Research, a division of Citigroup Global Markets Inc.

It noted that the direct fiscal savings in the budget will be apparent mainly in Malaysia, Indonesia and India as energy-related subsidies are directly and automatically reflected in the budgets in Malaysia and Indonesia, while it shows up with a short lag in the case of India. “Our estimates suggest that a US$10/bbl (per barrel) fall in oil prices is expected to have a larger impact on Malaysia, -0.56% of gross domestic product (GDP) fall in fiscal deficit, followed by Indonesia (-0.4% of GDP) and India (-0.3% of GDP fall in oil under recoveries),” it said in its report titled ‘Asia Macro and Strategy Outlook — Lower Commodity Prices — A Boon for Asia?’.

“However, fiscal savings on the budget/bond issuance will likely be most visible in Indonesia since the Malaysia government tends to spend any unprogrammed fiscal windfall to maintain the deficit according to plan,” it added. The research arm estimates that a drop in Tapis crude prices to US$85/bbl would completely eliminate fuel subsidies by applying the elasticity of the prices of RON97 and RON95 fuel to crude Tapis prices.

“Assuming unit elasticity of revenues to crude prices, we estimate that at US$90/bbl, there would be a positive net fiscal impact on oil that could cut fiscal deficits to 2.1%-2.5% of GDP,” said Citi Research.

It has also revised its inflation forecast for Malaysia upward to 4.1% next year after factoring in the effects of the recent fuel price hike of 20 sen/litre to RON95 and diesel prices, which was tempered by the enlarged list of exempted items under the goods and services tax (GST).

This is based on its estimate that the enlarged exemption list could reduce direct inflation impact from GST to 1.1% - 1.5% from the government’s previous estimate of 1.8% based on the earlier GST-exempt list.

The research agency has also pushed back its expectation of the next overnight policy rate (OPR) hike by Bank Negara Malaysia.

“We push back our call for the next [OPR] hike to Sept 2015, when there is sufficient 2Q15 and 3Q15 data to assess the impacts of GST, especially on consumption, and when the Federal Reserve starts hiking rates,” it said, adding that this would also depend on the evolution of the external environment and private consumption data.

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This article first appeared in The Edge Financial Daily, on November 4, 2014.

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