Nuffnang Add

Monday, December 9, 2013

Inflation pinch from rationalisation

Published: Saturday December 7, 2013 MYT 12:00:00 AM 
Updated: Saturday December 7, 2013 MYT 10:52:12 AM
Inflation is expected to inch up due to higher electricity tariffs from J an 1, 2014.
MANAGING inflation is a tricky business. With the expectation of further subsidies rationalisation next year and implementation of the Goods and Services Tax (GST) in 2015, inflation is no doubt creeping its way.

Nonetheless, it seems like the Government will space out its fiscal consolidation programme to soften the blow on consumers.

Despite that, inflation is expected to inch up due to higher electricity tariffs effective Jan 1. But economists do not expect a spike in it.

“Malaysia is well position to implement fiscal consolidation with an improvement in the external environment, better growth outlook and benign global inflation environment,” says RAM Holdings Bhd group chief economist Dr Yeah Kim Leng.

In September, the Government announced its decision to increase the price of RON95 and diesel by 20 sen to RM2.10 and RM2 per litre respectively, as part of its subsidies rationalisation programme.

This is the first time since 2010 that the Government cut its fuel subsidies. It expects to save RM1.1bil this year from September to December and RM3.3bil per year in subsidy bills from the exercise, helping to tame the fiscal deficit.

The Government has targeted to reduce its budget deficit to 4% this year, 3.5% in 2014 and 3% by 2015.

Latest data from the Statistics Department shows the consumer price index (CPI) rose to 2.8% year-on-year in October from 2.6% in September and 1.9% in August.

Economists say the sharp rise in inflation from August to October, which was the fastest rate of increase in nearly two years mainly due to an increase in fuel prices implementation and spilled over into other products and services.

The subsidised fuel prices come after Fitch Rating revised Malaysia’s credit-rating outlook to “negative” from “stable” in July, due to the country’s public debt level.

Government debt-to-gross domestic product (GDP) ratio is among the highest in South-East Asia. At 53.5% as at the end of last year, it is higher than the 25% in Indonesia, 51% in the Philippines and 43% in Thailand, says a report by Bloomberg.

The ratio for Malaysia is almost to the debt-ceiling limit of 55%.

Debt rationalisation will continue next year, as during the 2014 Budget announcement, the Government abolished the 34-sen sugar subsidy entirely as well as announced the implementation of GST of 6% in 2015.

According to a news report, Moody’s vice-president of Sovereign Risk Group Christian de Guzman said having too many heavy subsidies might not be good for inflation, as countries such as China, Indonesia and India, where utilities and petrol prices were low, experienced highly volatile consumer price indices.

Alliance Research chief economist Manokaran Mottain says reducing the fiscal deficit through subsidy cuts and improving government revenue is to counter the rating outlook downgrade by Fitch.

“We expect to see more fiscal consolidation to come in the next few quarters, among other things, through accelerated subsidy rationalisation. If the rumours about shifting civil servants’ housing loans from federal government’s balance sheet materialises, then the debt-to-GDP level could fall below 50%,” he says in a note to client.

Meanwhile, Moody’s on Tuesday says in a report that while the execution of reforms will be politically and administratively challenging, it will result in narrower fiscal deficits that will stabilise the country’s debt dynamics.

“Malaysia’s balance of payment remains healthy, despite a narrowing of its current account surplus over the past two years,” it adds.

Prior to the budget, the Government increased excise duty on tobacco by 14%, resulting in cigarette manufacturers raising the price of their products by 14% to 17%.
Analysts say the move would probably generate a cumulative RM435mil in Government revenue.

The previous hike in excise duty for tobacco was on Oct 1, 2010, with an increase of 3 sen per stick.

The latest blow is the new electricity tariff, announced on Dec 2, which would take effect on Jan 1.

On Wednesday, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz says the tariff hike’s impact on prices would only be temporary based on the central bank’s assessment of the trend.

“Right now, it would be in the region of 3%, but we don’t know what other adjustments are to take place,” Zeti told reporters at the Leadership Energy Summit Asia 2013.

Guzman says the new electricity tariff structure showed that the Government was on track to implement fiscal reforms.

“The hike would have a one-off impact on inflation but it will run off,” he told a press conference yesterday.

Economists are anticipating further fuel price hikes in 2014 and that some toll rates may go up, which would further drive up inflation.

It has been reported that the Government will decide next month whether to continue or do away with compensation paid to highway operators.

There are 29 toll roads operating in Peninsular Malaysia.

It said the Government would save more than RM400mil should it decide to do away with the compensation.

Most economists have revised their inflation forecast next year due to the recent electricity tariff hike announcement.

“We expect the consumer price index (CPI) to rise by 3.2% next year from 3% previously (before tariff adjustment), attributed to further subsidy rationalisation; utilities tariff adjustment and recent hike in assessment rates,” said Manokaran.

He adds that the growth in domestic demand would likely moderate to 6.8% in 2014, resulting from government’s move to consolidate its spending aimed at trimming the fiscal deficit, while private sector spending is being constrained by the inflationary pressures triggered by several policy reforms since September 2013.

OPR rates

Even if inflation is likely to trend upward in coming months, economists believe the central bank would keep monetary policy accommodative at least in the first half of 2014.

“We do not think that Bank Negara will react immediately to counter the anticipated rise in cost-induced inflation, which could be temporary,” CIMB Research says in a report.

Citigroup Inc economist Kit Wei Zheng says in a report to client that Bank Negaramight not be in a hurry to raise benchmark interest rates, which stands at 3%, as there were few signs of demand-pull inflation or second-round effects after the September fuel price hike.

He expected a 25-basis point rate hike in May, with another 25-basis point hike in July in anticipation of inflation hitting 3.8% to 3.9% from June/August.

Meanwhile, RHB Research expects the central bank to increase its overnight policy rate (OPR) at some point in time, envisaged to be 25 basis points towards late third quarter 2014 to 3.25% onwards due to price pressure build-up and after keeping it unchanged at 3.0% for more than two years.

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