The government is likely to announce more cuts to subsidies – the latest being the removal of the 34 sen subsidy per kilogramme for sugar in last Friday’s Budget 2014 – as it tries to trim its budget deficit further. Last September, the subsidy on petrol and diesel was cut by 20 sen a litre, which reportedly would save the government RM3.3 billion per year. In the case of subsidies, the government aims to reduce the total allocation from RM44 billion to RM36 billion this year, which will largely come from a RM7 billion saving from the September 2013 rationalisation and the anticipated subsidy adjustment, which we believe will materialise over the three to six months. “In addition, nearly RM1 billion will be saved from subsidy removal in sugar. The government may allow Tenaga Nasional Bhd to implement the fuel cost pass-through formula soon, which would see consumers paying more for electricity if there is an increase in fuel costs. This follows a mention in Budget 2014 which stated that the government would gradually restructure the subsidy programme, implying that it could still roll back subsidies post-budget, just like how it had cut fuel prices and raised the excise duty for cigarettes prior to the budget announcement. You can expect to see more fiscal consolidations to come in the next few quarters, among other things through accelerated subsidy Budget 2014 reiterated the government’s commitment to subsidy rationalisation although there were no details on the timeline albeit that it would be gradual. While this leaves some wriggle room for the government, it is somewhat disappointing considering its weak track record on execution. Fuel subsidies are running at RM20 billion to RM25 billion per year, while Petroliam Nasional Bhd subsidises gas for power and industrial users to the tune of about RM16 billion per year. The gradual rollback of fuel subsidies, higher inflation and rising interest rate environment will reduce disposable incomes and limit consumer discretionary spending. The rumours about shifting civil servants’ housing loans from federal government’s balance sheet materialises, then the debt-to-GDP level could fall below 50%. The fiscal deficit is on track to be reduced to 3% of the gross domestic product (GDP) by 2015 from 4.5% last year, on the assumption that leakages from the government spending can be plugged immediately. This could be offset by lower vehicle prices if the government’s strategy to streamline the industry and boost competition bears fruit. The unveiling of the 6% goods and services tax (GST), to begin in April 2015, could potentially push up inflation to around 4.7% in 2015 from the 2.8% projected for 2014 and 2.2% estimated for 2013 so you can look forward for more difficult days ahead in time to come.
Posted on: Tue, 05 Nov 2013 14:10:24 +0000
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