KUALA LUMPUR: MIDF Research anticipates that the government will cut fuel prices, particularly RON95 petrol and diesel, to ensure price stability and ease cost of living pressure in Malaysia.
If the government cuts the RON95 price by 10 sen to RM1.95 per litre next month, Malaysia's headline inflation is likely to ease to 2.9% for 2023 as non-food inflation moderates further towards 1.3%, while transport price experiences deeper contraction of -1.7%, it said in a note on Tuesday (July 25).
By year-end, the 10 sen-cut will bring the monthly headline inflation rate lower to +1.9% year-on-year (y-o-y), it said, adding that this also means that the government would have an additional RM4.31bil in fiscal expenditure, which can be utilised for other objectives.
"On top of that, the government will have even better fiscal space, given that fiscal debt-to-gross domestic product (GDP) ratio has fallen to 59.3% in the first quarter of 2023, and including contingent liabilities, the latest figure is 76.1%," MIDF Research said.
According to the consumer price index (CPI) weightage, transport cost is the third largest burden after food as well as housing and utilities.
"Considering the continuous elevated food inflation and downward income pressure, we anticipate the government to opt for slashing retail fuel prices, particularly RON95 petrol and diesel in the near term.
"Structurally, being a net food importer and aggravated by depreciated ringgit, it will be hard for the government to contain food inflation," the research house said.
During the first half of this year (1H 2023), the Brent crude oil price averaged at US$79.2 (US$1=RM4.57) per barrel, slightly lower than government's estimate of US$80 per barrel.
As such, MIDF Research estimated the non-subsidised market price for RON95 to be RM3.10 per litre.
In 2022, the RON95 price differential against market price widened to RM1.86 per litre.
"Thanks to normalising global oil price, the fuel price differential is estimated to be much lower at RM1.05 per litre this year. With the lower price differential, we believe the total subsidy expenditure will be lower than last year.
"From 2011 to 2013, the RON95 price differential was more than RM2.00 per litre as the global oil price hovered above US$100 per barrel, while the retail price of RON95 was kept at RM1.90-RM1.95 per litre," it said.
