RHB Research: Malaysia has sufficient fiscal space to continue subsidizing fuel and other subsidies in 2022 | Money

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A man refuels his motorbike at a Petronas gas station in Ipoh on November 2, 2020. – Image by Farhan Najib

KUALA LUMPUR, April 8 – Malaysia has enough fiscal space to continue subsidizing fuel and other subsidies in 2022, despite soaring global food and oil prices, RHB Research said.

Its economists believe that “proactive fiscal policy, from the standpoint of food and fuel subsidies, will help contain fundamental inflationary pressures.”

“There is limited risk that the fuel and food subsidies, as well as the pricing formula for RON 95 and diesel prices at petrol pumps, will change significantly in 2022,” the Commission said today. research house in its RHB Market Outlook note.

As oil prices rose above US$100.00 a barrel, the government announced that the fuel pricing mechanism could be reviewed and would be more targeted. The 2022 budget, tabled last year, had assumed an average of US$67.00 per barrel.

However, the government is unlikely to implement substantial changes to its subsidy formula for 2022, although fuel subsidies could reach RM28 billion in 2022 from RM11 billion in 2021, he said. declared.

“We believe there is enough strong oil-related revenue coverage through oil tax revenues, Petronas dividends and oil royalties,” he added.

While the government would have to depend on higher dividends from Petronas – if oil prices remain high – it would be an inefficient allocation of scarce resources, economists said. Moreover, it would ignore Petronas’ own capital expenditure (capex) and operational needs.

Higher oil prices would ultimately lead to higher domestic fuel prices, which could have an impact on consumption growth and inflation, as well as policy implications for the incumbent government over the next an election year.

However, with retail fuel prices currently set at US$55.00 per barrel, the subsidy bill is reaching unsustainable levels. “This could affect the government’s ability to meet its fiscal deficit targets,” RHB said.

However, a fall in the price of crude oil would be a net negative for Malaysia, as it is the only net exporter of oil and gas in ASEAN, given the financial contributions from oil income taxes, royalties and dividends from Petronas.

It would also lead Petronas to take a more cautious stance on developing domestic oil and gas resources, with a reduced capital budget that would dampen local oil and gas prospects, economists said. “A decline in oil revenue would be negative for the country’s current account position and for the ringgit,” the research house said.

Regarding gross domestic product (GDP) growth, RHB maintained its 2022 growth forecast of 5.5% year-on-year (yoy) compared to Bloomberg’s consensus forecast of 6% and the estimate. 6.5-7.5% from the Ministry of Finance (MoF).

“We continue to believe that the first quarter of 2022 (Q1 2022) will be a difficult period for economic activities, with industrial production (IP) data from February and March likely to weaken further.

“With slower PI, labor markets will show the rate of improvement is slowing,” the research house said.

Additionally, consumer confidence could be affected by Omicron-related issues and the conflict in Ukraine.

On the headline consumer price index (CPI) for 2022, RHB economists said there was no change in its forecast of 2.6% from Bloomberg’s consensus estimate of 2. .4%.

“The basic view is that core CPI inflation will double to around 2% by April 2022 due to (the height of the caps) on fuel and food (will be), since the Ministry of Finance is concerned about the high subsidies on these products,” the report said.

Regarding the Overnight Policy Rate (OPR), RHB economists expect Bank Negara Malaysia to raise the OPR by 25 basis points in the second half of 2022. — Bernama

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