RM12b in savings from managed float system

MALAYSIA is likely to save up to RM12 billion next year following the government’s move  to implement the managed float system for retail fuel products such as RON95 and diesel next month, said Barclays Research.

“This should make up for the shortfall in petroleum tax and royalties, which have also fallen in  tandem with declining crude oil prices,” said the United Kingdom-based research house.

According to Barclays, petroleum tax and royalties constitute more than RM35 billion of revenue this year, or 15 per cent of total revenue.

The fuel subsidies for public transport vehicles, fishing vessels and cooking gas have  been left unchanged.

The government said last Friday it was moving the pricing of retail products such as RON95 and  diesel to an automatic price mechanism on a managed float system.

It had raised the fuel prices before the 2015 Budget was presented  in Parliament last month.

Barclays said Malaysia’s move follows India and Indonesia in addresing fuel subsidies and is likely to save between RM10 billion and RM12 billion, or one to 1.2 per  cent of gross domestic product (GDP) next year.

“We continue to expect the 2015 fiscal deficit to come in at three per cent of GDP,” it said.

In terms of its immediate impact, Barclays said RON95 and diesel prices might decline  modestly (at five sen each) early next month.

However, it cautioned that this impact could be negated by a potential electricity price  hike in the first quarter of next year and the implementation of the Goods and Services Tax in April.

“If fuel prices change regularly, then the impact on inflation expectations may be larger than  previous fuel price changes,” Barclays said in reference to a comment by Bank Negara Malaysia governor  Tan Sri Dr Zeti Akhtar Aziz that the inflation impact of the fuel pricing decision was likely to be  minimal and little impact on monetary policy.

In order to limit the potential impact from higher prices in future, Barclays said the  government might increase cash transfers to lower income households.

“In our view, this would mean that the path of fiscal consolidation is unlikely to change significantly from a 3.5 per cent of GDP fiscal deficit this year to three per cent next year,” 

The government said last Friday it was moving the pricing of retail products such as RON95 and  diesel to an automatic price mechanism on a managed float system.