SERC's Lee pointed out that higher oil prices would increase oil-related revenue for the government, but that would be partially offset by fuel subsidies.
PETALING JAYA: As Malaysians begin to set their sights on the tabling of Budget 2024, which is less than a month away, another macroeconomic factor has been emerging on the horizon.
The price of crude oil has crept up steadily since the turn of the year, with the Brent crude oil contract having appreciated by 16.5% since Jan 3, although on a year-on-year perspective, the price rise has been a relatively much smaller 3%.
With market analysts already anticipating oil to test the US$100 a barrel level, this will need to be watched by policymakers, as higher energy prices tend to seep into the broader supply chain of production and ultimately to the consumer.
The concern that arises this time is perhaps particularly relevant, as the government has been making it clear it wants to enhance its coffers and higher crude oil prices look to be beneficial to oil-exporting Malaysia. However, this would also elevate the subsidy bill.
Having said that, and as recent experience can attest to, the oil price is known to be closely linked to inflation. This is something which Putrajaya, like most other governments globally, has been doing its best to keep a lid on.
Former chief economist of the European Central Bank Peter Praet reiterated to Bloomberg yesterday the reminder that consumers and households were extremely sensitive to oil and food prices.
Taking a look at what the sustained price of oil would mean to Prime Minister Datuk Seri Anwar Ibrahim’s administration and its plans moving forward, executive director of the Socio-Economic Research Centre (SERC) Lee Heng Guie pointed out that higher oil prices would increase oil-related revenue for the government, but that would be partially offset by fuel subsidies.
Going into the math, he said every US$1 per barrel rise in oil prices could yield an additional oil revenue of RM300mil for the country.
“Based on our estimate, the current subsidised retail price of RM2.05 per litre for RON 95 averages RM1.20 per litre throughout this year, incurring an estimated total subsidy of RM17bil based on an annual consumption of 14.4 billion litres,” he told StarBiz.
While headline inflation has been trending down in recent months, Lee cautioned that core inflation has remained persistently high, and the inflation outlook in 2024 would depend on the development in global energy and commodity markets, as well as the changes in the domestic fuel subsidy policy.
Acknowledging that the anticipated implementation of the targeted fuel subsidy rationalisation is expected to exert transportation inflation as well as fuel-related price pressures, he added that recent hikes in the price of imported rice and other food ingredients would add to food inflation.
On top of that, he reckoned that the upcoming Budget 2024 is expected to use the Brent crude oil price assumption of US$85 to US$90 per barrel compared to US$80 in the 2023 edition.
If the oil price continues to remain elevated, it is understood that the resultant higher energy prices would lead to a restraint in consumer spending, giving central banks worldwide less reason to continue their sustained tightening policies.
The balancing act of maintaining growth but keeping a leash on inflation means that policymakers, like the US Federal Reserve, will be on alert for any signs that inflation expectations are drifting higher, which thankfully has not happened as of yet.
In line with this, Lee is expecting Bank Negara to keep its overnight policy rate (OPR) steady at 3% in 2024 as it balances the risks to economic expansion with inflation.
“The domestic growth momentum has moderated in recent months due to falling exports and slowing domestic demand. As long as the anticipated subsidy rationalisation is at a measured pace, Bank Negara would be able to tolerate a small uptick in inflation, which will be largely cost-driven,” he said.
Sunway University professor of economics Yeah Kim Leng believes it is reasonable to expect oil prices to hover around the US$90 to US$100 a barrel level for the rest of the year, given the production cut by the Organisation of the Petroleum Exporting Countries and its allies producers and the recovery in the Chinese economy, as well as the US economic resilience.
“These factors could push global oil demand, extending the high oil price run into next year,” he said.
Given that the government will indicate how it plans to rationalise the fuel subsidy in the coming Budget 2024 as stated by the Prime Minister in Parliament yesterday, Yeah is anticipating the inflation outlook for the rest of the year to remain relatively unchanged.
“Concurrently, how inflation will fare next year will depend on the timing, pace and magnitude of the fuel subsidy withdrawal, but the negative inflationary impact is expected to be moderated by income support and mitigation measures that will be rolled out simultaneously,” he told StarBiz.
Agreeing with SERC’s Lee that Putrajaya will need to lift its oil price assumption for Budget 2024, Yeah thinks the adjustment would see the assumption raised to US$90 to US$100 a barrel, with its implications on revenue, expenditure and fiscal deficit target, along with the impact of fuel subsidy rationalisation plans incorporated into the budget.
More notably, Yeah is of the view that the shift from blanket to targeted subsidy assumes greater urgency now that the crude oil price has risen above the expected level for 2023 and appears to continue through next year.
He said, “A targeted subsidy scheme will reduce the expenditure outlay, the size of which depends on the quantum and coverage of assistance provided to the targeted low and medium-income households.
“The challenge for the government is to find a judicious balance between keeping the fiscal deficit at a manageable level and ensuring the affected groups are cushioned with income support and social assistance to offset the higher fuel cost and cost of living increases.”
Echoing Yeah’s sentiment, chief executive of the Centre for Market Education and economist Carmelo Ferlito is adamant that the government find a way to effectively implement its targeted subsidy initiative, calling it a must for fiscal sustainability.
He remarked that the crude oil price remaining at close to US$100 for the final quarter of the year could be a double-edged sword for the government, as it raises the subsidy bill together with revenue.
Separately, Ferlito is hoping prudence will prevail at the tabling of Budget 2024 and that the unity government is not intending for unnecessary expenditure, which would be vital to keep inflation at bay and the OPR sustained at the current level.
