No major economic shocks from fuel price hike, says economist

-A +A

PETALING JAYA: The government is unlikely to meet its budget deficit target this year of 3.5% of gross domestic product (GDP), said Kenanga Research, as the latest cut in fuel subsidy for RON 95 petrol and diesel by 20 sen is only being implemented at the tail end of the year.

The last price hikes for electricity and gas were early in the first quarter and second quarter of 2014 respectively.

“Considering, we still think [the government] won’t quite be able to make it (hit the 2014 budget deficit target),” said Kenanga Research in a note to clients yesterday.

The research firm also noted that the government had requested a supplementary budget of RM4.1 billion for development expenditure, of which RM1 billion was to be used for petrol, liquefied petroleum gas and diesel subsidies.

“At the same time, some money had to be supplied for the logistics surrounding the MH17 and MH370 flight tragedies. This may be minimal in the bigger scheme of overall spending but that small addition may further push spending past their allocated budget for the year,” the research house said.

Kenanga Research is keeping its federal budget deficit forecast at 3.7% and consumer price index average at 3.3% for 2014.

However, CIMB Investment Bank Bhd regional economist Julia Goh is of the view that the government will be able to narrow the budget deficit to 3.5% of GDP this year, given the growth in revenue by 6.8% year-on-year to RM101.8 billion in the first half.

“Though operating expenditure is higher, this is partly offset by the shortfall in development expenditure,” she told The Edge Financial Daily via email.

“As such, we are expecting the deficit to come in at around RM37.4 billion or 3.5% of GDP. The fuel subsidy bill may be [lower] thanks to lower global oil prices,” she said.

Goh expects the government to announce a new fuel subsidy scheme, although finer details may remain unclear until later this year when it is expected to be released.

Goh also reckoned that sin tax is not expected to increase, due to increases in taxes in the tobacco and brewery industries last year.

“The brewery sector was hit by the higher duty payment as a result of the imposition of taxes on A&P (advertising and promotion) expenses and royalties paid since Nov 1, 2013, while the tobacco players were negatively affected by the sharp increase in excise duties since September 2013,” she said.

“We believe the government will spare them this time round,” she said.

Dr Yeah Kim Leng, dean of the School of Business at the Malaysia University of Science and Technology, does not expect the latest fuel price hike to result in “major shocks” to the local economy.

“The increase in inflation [after the fuel price hike] should not be more than 1%, possibly rising by another 0.2% to 0.4%. [The latest hike] is manageable. The rate of inflation is projected to remain between 3% to 3.2% this year,” he told The Edge Financial Daily by telephone yesterday.

“The only concern is the low-and middle-income groups who will be affected,” he said.

Still, Yeah believes that the low-income group can expect a higher quantum of the 1Malaysia People’s Aid (BR1M) handouts, while the middle-income group may see their personal income tax reduced and incentives for public transport usage in Budget 2015, to be announced next Friday.

Yeah is of the view that the announcement of the fuel price hike is positive for the economy to achieve an efficiency equilibrium, by narrowing the gap between the market price of fuel and the subsidised price. It will also encourage the use of public transport.

The price of RON 95 was raised by 20 sen on Wednesday to RM2.30 per litre and diesel to RM2.20 per litre.

This article first appeared in The Edge Financial Daily, on October 3, 2014.