Market lauds fuel subsidy rationalisation

Publication: NST

Date of publication: Sep 4, 2013

Section heading: Business Times

Page number: 002

Byline / Author: By Rupa Damodaran

KUALA LUMPUR: The government's fuel subsidy rationalisation was widely welcomed by the market, which now expects the goods and services tax (GST) to be announced during the tabling of the 2014 Budget next month.

Economists are confident that Malaysia will achieve its fiscal budget target of four per cent of the gross domestic product (GDP) this year with the flow of revenue, especially after the fuel subsidy cut which will result in savings of RM1.1 billion for this year and RM3.3 billion for 2014.

CIMB Investment Bank, however, said the government must draw up a timeline of actions to execute the fiscal consolidation measures.

"This is to assure investors that it has the political resolve to address the country's fiscal issues without delay," said chief economist Lee Heng Guie.

"Faced with the risk of a sovereign ratings downgrade and investors' focus on the domestic and external sectors' vulnerabilities at a time of a retrenchment of foreign capital, it is crucial that Malaysia fine-tunes its macroeconomic policy mix for growth and financial stability over the medium term."

Dr Chua Hak Bin of Bank of America Merrill Lynch said although the government's move will save it billions, the impact on the fiscal deficit is quite small, thus requiring further measures.

Chua estimated the fiscal deficit came in at RM19.4 billion, or 4.1 per cent of GDP, in the first half of 2013, based on available monthly data.

The government had allocated RM24.8 billion for fuel subsidies this year, an amount that would probably have been easily breached without a fuel price hike.

Lower crude oil prices in the early part of the year, added Chua, have kept fuel subsidy costs in check, but global oil prices have been rising of late.

"The fuel price hike should also curb rising oil imports, and improve the oil-trade and current account balances," he added.

The oil-trade deficit had worsened to RM2.7 billion in the second quarter, contributing to the worsening of the current account surplus to RM2.6 billion during the period, making it the smallest surplus since the Asian financial crisis.

Credit Suisse said the move is good for the ringgit in the near term, with risks of the US dollar versus ringgit trading lower than the three-month forecast of RM 3.3.

"However, the large foreign investors' holding of government bonds (47 per cent) and central bank bills (84 per cent) will continue to be an overhang on the ringgit in the medium term, especially with the risk of US Fed tapering in September."