PETALING JAYA: And so it begins. The much anticipated and talked about fuel subsidy rationalisation by Putrajaya has officially taken its first step in the form of floating diesel prices in Peninsular Malaysia, effective midnight yesterday.
The move will see diesel retail prices being increased by RM1.20 per litre, or a whopping 56%, to RM3.35 per litre, and subject to weekly reviews.
Still, most economists in general are staying calm on the diesel price hike’s potential effect on the consumer price index (CPI), with some confident enough to maintain or even lower their inflation forecasts for the whole of 2024, albeit with the looming rationalisation of RON95 subsidies pending over the horizon.
While the targeted diesel subsidy mechanism is expected to save the government about RM4bil a year, UOB Global Economics and Markets Research economists Julia Goh and Loke Siew Ting said rationalising diesel subsidies is perceived as a “low hanging fruit” to plug the fiscal holes and improve the efficiency of government operating expenditure.
Of note, they said: “Given that diesel carries just 0.2% weight in overall CPI basket, the direct impact is likely to be minimal at around 0.1% to overall inflation.
“According to data provided by the Statistics Department, the Budi Madani cash assistance of RM200 per month is sufficient to cover 80% of diesel vehicle owners based on consumption pattern.”
Nevertheless, they believe the second round effects or indirect pass-through impact will be worth keeping an eye on, given the below-target registration rate for the Subsidised Diesel Control System 2.0 (SKDS 2.0) among individuals, small-scale farmers and commodity smallholders.
Following the diesel subsidy rationalisation, Goh and Loke opined that the restructuring for RON95 is next, although they feel uncertain if it will be done before the end of the year, bringing to attention that Budget 2024 itself was silent on the fuel.
“The timing of RON95 subsidy cuts will depend on how the effects of diesel fare and the readiness of the Central Database Hub (Padu), the platform that determines eligibility of cash aid,” they said.
More importantly, they pointed out that the direct and indirect effects of price hikes for the “kuning” fuel, which carries 5.5% weight in overall CPI basket, will be more significant on inflation, given that it affects the bulk of the 36.6 million registered motor vehicles and made up RM66.7bil in retail sales of automotive fuel in 2023.
Goh and Loke said that currently, non-subsidised RON95 is estimated to be priced at RM3.35 per litre, and pending more developments on targeted diesel subsidies as well as announcements on RON95 fuel subsidies rationalisation, they are maintaining their 2024 full-year inflation forecast at 2.6%.
Meanwhile, CIMB Treasury and Markets Research is predicting policymakers to recalibrate RON95 only in the last quarter of the year (4Q24), potentially coinciding with the tabling of Budget 2025 on Oct 11.
Explaining its projection, the research unit observed that the Finance Ministry is having its hands full with Budi Madani applications, which is expected to increase following the diesel price hike.
Moreover, the government may wait for the June and July inflation data, anticipated to be released on July 21 and Aug 22, respectively, to assess the impact of the diesel mechanism before proceeding with RON95 subsidy cuts, said the research outfit.
“There is going to be a wider implication of RON95 subsidy cuts on household purchasing power as compared to diesel.
“The direct contribution of a 10% increase in RON95 retail price on headline inflation is estimated at around 0.5 percentage points, compared to diesel’s 0.02 percentage points,” it added.
Perhaps counterintuitively, CIMB Treasury and Markets Research is revising its inflation forecast downwards from 2.7% to 2.3% for 2024, reflecting the milder-than-expected respective headline and core inflation rates of 1.7% and 1.8% for the first four months of the year.
In tune with the other experts, leading economist Prof Geoffrey Williams noted that with diesel prices making up only 0.2% of the CPI, there should not be any noticeable increase in general prices from the consumer’s perspective.
“If people see prices rising and companies blaming this diesel subsidy rationalisation, they should report the company or stop buying from them and find a better deal from somewhere else,” he told StarBiz matter-of-factly.
Since most commercial users will get fleet cards or quotas and still pay the subsidised rate, Williams believes this would instead improve the control of diesel usage among consumers.
“Smallholders will get RM200 per month, so any increase will be compensated for them.
“They have to use more than 167 litres before it costs more and most will be better off if they can economise on how much they use,” he said, before also urging the government to communicate the progress and successes of the diesel subsidy rationalisation for the public’s knowledge.
At this point, it merits to be highlighted again that Second Finance Minister Datuk Seri Amir Hamzah has previously revealed the amount of subsidised diesel grew from 6.1 billion litres in 2019 to 10.8 billion litres in 2023, which did not measure up with single-digit growth of registered diesel vehicles.
The leakages are estimated at RM1.6bil annually but even with the rationalisation, UOB’s Goh and Loke ascertain risks to smuggling activities will persist as Malaysia’s diesel pump prices at RM3.35 per litre still remains the second lowest in Asean, after Brunei.
When it comes to RON95, however, it is noteworthy that both Williams and Centre for Market Education chief executive Carmelo Ferlito believe that subsidy rationalisation involving RON95 should only be carried out when a proper system is in place.
Ferlito said the government should only move on to the subsidised petrol when the “smaller-scale” experiment with diesel has produced enough input to design a fine-tuned system.
Williams agreed, remarking that rationalisation with RON95 is more complicated because it involves the general public and millions of petrol customers.
“It should not be rushed until a proper system is in place. So the earliest would be 4Q24 and possibly changed in stages through to next year,” he said.
For 2024, he is expecting headline and core inflation to remain moderate at 2% to 3.5%, and 2% to 3%, respectively.
“It is likely that inflation will be lower than the current inflation target between 2% and 3.5%, and hover around 2% to 2.5%, on average,” he said.
Meanwhile, Socio-Economic Research Centre executive director Lee Heng Guie expects headline inflation to increase by 2.8% to 3.5% this year, as he believes Putrajaya will be assessing the implication of the diesel subsidy rationalisation for at least six months before carrying out petrol subsidy rationalisation, most likely in 2025.
On a separate note, Ferlito for his part believes the estimated RM4bil savings by the government could be put into improving public transport and urban mobility.
He said a better transport system will be a sustainable initiative to ensure Malaysians move away from a subsidy-dependent structure.
“The government is currently giving out cash aids to alleviate the pain but this way, the people can become dependent on subsidies again but only in another form.
“The best way over the long term is for Malaysians to be able to commute effectively on a better public transport system,” he said.
