KUALA LUMPUR (Feb 22): As oil prices hit levels not seen since eight years ago amid the geopolitical tension between Russia and Ukraine, UOB Research said the government could see fuel subsidies rising to RM18.6 billion if Brent crude averages around US$90 per barrel this year.
This could prompt Putrajaya to look into its fuel subsidy rationalisation, the research house said.
At press time, Brent crude was trading at US$97.67 per barrel, after earlier nearing the US$100 per barrel mark. Since the start of the year, Brent crude has risen by about 26%.
In a macro note on Tuesday (Feb 22), UOB Research said the fuel subsidy rationalisation plan could be back in the government’s focus to manage the burgeoning subsidy bill and rebuild fiscal space to respond to future challenges.
The spike in crude oil prices is a double-edged sword for Malaysia’s fiscal position, it said, as higher oil revenues are countered by rising fuel subsidies.
“This (RM18.6 billion fuel subsidies) makes up approximately 60% of the government’s total allocation of RM31 billion for various subsidies, aids and incentives under Budget 2022.
“Should Brent oil prices average above US$90 per barrel, we estimate that the government’s fuel subsidies could rise to a record RM24 billion,” it said.
UOB added that the additional oil revenue, estimated at RM7.2 billion, would not be sufficient to cover the higher fuel subsidy bill.
It also highlighted that the country’s fiscal space remains constrained by the imposition of record stimulus packages over the last two years to mitigate the adverse impact of Covid-19 on the economy.
“The sharper rise in fuel subsidies will bring the attention back to subsidy rationalisation plans and subsidy reforms in order to manage the burgeoning fuel subsidy bill.
“While subsidy rationalisation plans and subsidy reforms should be part of broader fiscal consolidation efforts to improve resource allocation and rebuild fiscal space, there may be political and economic challenges to implement the reforms at this juncture,” the research house elaborated.
The fuel subsidy rationalisation plan was previously implemented in September 2013, whereby the government reduced its fuel subsidy by 20 sen per litre.
It was then estimated that the 20 sen per litre reduction in fuel subsidy would help the government save RM4 billion in 2014.
“If we assume a similar fuel subsidy reduction of 20 sen/litre this year, it could help the government save around RM4.2 billion from March to December 2022 (based on an average Brent oil price assumption of US$90/bbl),” UOB Research added.
Meanwhile, Associated Chinese Chamber of Commerce and Industry of Malaysia’s Socio-economic Research Centre (SERC) executive director Lee Heng Guie said a crude oil price average of US$95 per barrel in January 2022 will add extra revenue of RM10.2 billion, when contacted by The Edge Weekly.
Meanwhile, Associated Chinese Chamber of Commerce and Industry of Malaysia’s Socio-economic Research Centre (SERC) executive director Lee Heng Guie said a subsidy of between 70 sen and 85 sen per litre for RON95 could add up to RM12 billion, based on 14.4 billion litres.
“The fuel subsidy bill would be larger if we add diesel [in the calculation], which is estimated at RM6.5 billion. Overall, it is a net revenue loss of RM1.8 billion,” said Lee when contacted by The Edge Weekly.
He further said that a rational move would be for the government to consider reducing fuel subsidy in stages to allow for a gradual increase in pump price, but the current cost increases for businesses and high inflation pressure on consumers could have restrained the government from adjusting the fuel prices at this juncture.
It is politically sensitive to tinker with fuel, gas and electricity prices, Lee said, as they are some of the most sensitive factors for households and businesses amid the uneven state of economic and business conditions post the reopening of the economy. He added that it would be inappropriate to float the RON95 prices at this juncture.