PETALING JAYA: The government may fork out RM28bil for fuel subsidies this year if crude oil price continues to stay above US$100 (RM420) per barrel.
While the government would gain higher oil revenue, KAF Research said the fuel subsidies bill in 2022 could be five times higher than the RM5.3bil allocated under Budget 2022.
“Based on the above analysis, the government will receive a higher oil revenue amounting to about RM57bil this year from RM44bil estimated under Budget 2022 at the current oil price of about US$109.20 (RM458) per barrel, which is 65.5% higher than Budget 2022 assumption of US$66 (RM277) per barrel.
“However, the government would also incur a subsidy bill of RM28bil. The larger-than-expected rise in subsidies of RM22.7bil would dwarf the RM13bil increase in oil revenue.
“Therefore, contrary to popular belief, higher oil prices may pose a net negative impact on Malaysia’s fiscal position to the extent that every US$10 (RM42) per barrel increase in oil price raises the fiscal deficit by 0.1% of gross domestic product (GDP),” it said in a report yesterday.
The government spent about RM11bil in fuel subsidies when the oil price averaged at US$70.85 (RM297) per barrel last year.
Brent crude oil went above US$100 (RM420)per barrel last month – the highest since 2014, when Russia began a military invasion of Ukraine on Feb 24.
Russia is the world’s third largest oil producer behind the United States and Saudi Arabia.
According to KAF Research’s sensitivity analysis, for every US$1 (RM4.20) per barrel increase in Brent crude price will translate into RM300mil rise in the government’s revenue.
However, the same rise in oil prices will also increase the subsidy bill by RM440mil.
“These translated into a net fiscal impact of minus RM140mil for every US$1 per barrel increase in oil prices after subsidies kick in above the break-even of US$55 (RM231) per barrel mark,” it said.
Despite the net negative impact from rising oil prices on Malaysia’s fiscal accounts, the research house maintained the fiscal deficit estimate at 6% of GDP for 2022 as the government has several options to cover the shortfall of RM7bil to RM10bil based on the average oil price estimate of between US$90 and US$110 (RM378 to RM462) per barrel.
“At this juncture, the government has two options.
“It can choose to revert back to the shelved targeted subsidy programme and abolish the fuel price ceiling, or raise the price ceiling to a more tolerable level of RM2.80 to RM3 per litre,” the research house pointed out.
“Before an announcement is made regarding the targeted fuel subsidies, we expect Bank Negara to begin normalising rates in the second half of this year at the pace of one to two rate hikes,” it added.
Recall that Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said the government is studying the fuel and cooking oil subsidy mechanism, so that it will be targeted towards aiding the vulnerable groups.
This is not the first time that Malaysia had to implement a targeted subsidy programme.
In 2008, the government introduced a petrol cash assistance programme by paying an annual amount of between RM150 and RM625 to motorists.
Simultaneously, fuel prices were floated, and the RON97 petrol and diesel prices rose 41% to 63% overnight from RM1.58 to RM1.92 to RM2.58 to RM2.70 per litre.
“As a result, headline inflation shot up to 5.4% in 2008 – its highest in 26 years, from 2% the year before,” KAF Research said.
In 2014, the government abolished fuel subsidies and based the fuel prices on an automatic price mechanism.
It reintroduced fuel subsidies in 2018, setting the RON95 and diesel prices at RM2.20 and RM2.18 per litre respectively in tandem the higher oil prices.
It reduced the ceiling prices to RM2.08 and RM2.15 per litre in 2019 as it awaited the rollout of the targeted fuel subsidy programme under Budget 2019.
