Economics Markets Strategy - the DBS Vickers Securities Equities ...

Economics: Malaysia
Economics – Markets – Strategy
MY: Biting the bullet
• Prime Minister Badawi finally announced the much anticipated restructuring
of the energy subsidy program
• Malaysia is expected to remain a net exporter of crude oil until 2014 and
current restructuring is expected to bring about longer-term fiscal
sustainability and economic efficiency
• However, the subsidy cuts are expected to stoke inflation and cause growth
to slow
• Inflation will peak at 5.8% in Jun08 and is set to average 4.5% for the full
year. Our inflation forecast for 2009 has also been lifted to 3.3%
• We expect Bank Negara to hike the policy rate by 50bps at the next policy
meeting in July, to anchor inflation expectations and to prevent secondround
effects of inflation
• Growth is expected to moderate to 5.1% for the year. Our 2009 growth
forecast has also been trimmed to 5.8%
MALAYSIA
The restructuring
of Malaysia’s
energy subsidy
program is
expected to save
the government
some MYR 13.7bn
Revision to the
subsidy program
will negatively
impact consumers
Short term pain, long term gain
After weeks of speculation, Prime Minister Badawi finally announced the much
anticipated restructuring of the fuel subsidy program. The changes, effective
June 5, have lifted petrol prices by 41% to MYR 2.70/ltr, and diesel prices by
MYR 1 to MYR 2.58/ltr. Prices will be reviewed on a monthly basis hereafter. In
addition, power tariffs for commercial users will rise by 26% while Tenaga will
introduce a new power-tariff structure from 1 July. Prices of gas supplied by
Petronas will also double as part of this restructuring process. All in, the restructuring
process is expected to help the government save about MYR 13.7bn this year.
Separately, to further shore up its revenue, the government is also imposing a
windfall tax of 5%-15% on palm oil millers, for crude palm oil priced above
MYR 2,000 per metric ton.
The revision to the subsidy Chart 1: Higher oil prices lifted oil trade balance
program will help to improve MYR mn
USD/bbl
the government’s fiscal
140
position, but not without
Oil trade balance
6000
short-term detrimental effects
Oil prices
120
on consumers. In order to
5000
soften this impact, particularly
100
for the lower income group,
the government will offer
cash rebates for the first 800
litres of petrol used by owners
4000
3000
80
60
of small cars and motorcycle. 2000
This is equivalent to a rebate
40
of about MYR 625 for the
year for owners of cars below
2000cc, and MYR 150 for
1000
0
20
0
motorcycles. Road tax for
cars below 2000cc will also
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07
be lowered by MYR 200. Furthermore, some of the savings from the new measures
will be diverted to food subsidies to benefit the poor more directly.
Irvin Seah • (65) 6878 6727 • irvinseah@dbs.com
108