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RHB Research: Malaysia has enough fiscal space to continue fuel and other subsidies in 2022
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A man refuels his motorcycle at a Petronas petrol station in Ipoh November 2, 2020. — Picture by Farhan Najib
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KUALA LUMPUR, April 8 — Malaysia has enough fiscal space to continue with fuel and other subsidies in 2022, despite the spike in global food and oil prices, RHB Research said.
Its economists believe that “a proactive fiscal policy, from a food and fuel subsidy perspective, will help contain core inflationary pressures.”
“There are limited risks for fuel and food subsidies, along with the formula to price RON 95 and diesel prices at petrol pumps, to be changed significantly in 2022,” the research house said in its RHB Market Outlook note today.
As oil prices rose past US$100.00 per barrel, the government had announced that the fuel pricing mechanism could be reviewed and would be more targeted. Budget 2022, tabled last year, had assumed an average of US$67.00 per barrel.
However, the government is unlikely to implement any substantive changes to its 2022 subsidy formula, although fuel subsidies could hit RM28 billion in 2022 compared to RM11 billion in 2021, it said.
"We believe that there is enough cover from robust oil-related revenues via petroleum tax revenues, Petronas dividends and petroleum royalties," it added.
While the government would have to depend on higher dividends from Petronas - should oil prices remain high - this would be an inefficient allocation of scarce resources, the economists said. Also, this would be ignoring Petronas’ own capital expenditure (capex) and operational needs.
Higher oil prices would ultimately lead to increased domestic fuel prices, which could impact consumption growth and inflation, as well as political implications for the incumbent government in an election year.
However, with fuel retail prices currently benchmarked to US$55.00 per barrel, the subsidy bill is reaching unsustainable levels. "It may affect the government’s ability to attain its fiscal deficit targets," said RHB.
However, a lower crude oil price would be a net negative for Malaysia, as it is the only net oil and gas exporter in Asean, given the financial contributions from petroleum income taxes, royalties, and Petronas dividends.
It would also result in Petronas undertaking a more cautious stance when it comes to developing domestic oil and gas resources, with a reduced capex budget that would dampen local oil and gas prospects, said the economists. "A reduced oil revenue would be negative for the country’s current account position and the ringgit," the research house said.
On gross domestic product (GDP) growth, RHB has maintained its 2022 growthforecast of 5.5 per cent year-on-year (y-o-y) versus Bloomberg's consensus forecast of 6 per cent and the Ministry of Finance's (MoF) 6.5 to 7.5 per cent estimate.
"We continue to believe that the first quarter of 2022 (Q1 2022) will be a soft patch in economic activities, with February and March industrial production (IP) data likely to weaken further.
"With slower IP, labour markets will show that the rate of improvement is slowing," the research house said.
In addition, consumer sentiment could be impacted by Omicron-related issues and the Ukraine conflict.
On 2022's headline consumer price index (CPI), RHB economists said there is no change to its 2.6 per cent forecast versus Bloomberg's consensus estimate of 2.4 per cent.
"The baseline view is that core CPI inflation will double to around 2 per cent by April 2022 on the back of (how high the caps) on fuel and food (will be), since the MOF is worried about elevated subsidies on these products," the report said.
On the overnight policy rate (OPR), RHB economists expect Bank Negara Malaysia to hike the OPR by 25 basis points in the second half of 2022. — Bernama