So, come December 1, RON 95 petrol and diesel will no longer be subsidised, and their pricing will be set via a managed float, similar to the one employed for RON 97 petrol. Good, or bad news? A few research firms have offered their takes on the issue.
According to a Bernama report, RHB Research Institute believes the move can ease the government's subsidy burden, since plummeting global crude oil prices will impact oil revenue negatively, as well as put pressure on the government's budget deficit.
"We do not expect the move to impact the economy negatively, as we believe consumers as well as businesses, can adjust to it and will likely get used to it over time. The savings from the fuel subsidy can then be used for more productive purposes such as development and improve the country's competitiveness," the institute said in a note.
RHB Research said the managed float system will likely prevent businesses from simply raising prices each time the fuel subsidy is cut. "We believe the strength of economic growth will likely be a more important consideration, relative to inflation for monetary decision in 2015, given the challenging global economic environment," it said.
Meanwhile, Kenanga Investment Bank expects little to no impact on inflation, as October's hike already brought the fuel price close to the unsubsidised rate. It added that this should have minimal impact on the monetary policy which the research firm feels will be more concerned about weaker global growth next year.
"Nonetheless, the move will definitely help the government towards fiscal consolidation and making the fiscal deficit target of 3.5 per cent of gross domestic product in 2014 and 3.0 per cent in 2015, more than likely, achievable," it said.
CIMB Economic Research had similar sentiments, telling The Star that the move will have a benign effect on overall inflation as the average market price is close to the current fixed retail price, but if oil prices continue to drop, this may change.
"We estimate that every 5 sen decline in RON 95 prices shaves off about 0.2% of the consumer price index on-month. If oil prices decline further, this would help defray the spike in inflation as a result of the Goods and Services Tax (GST) implementation," it told the English-language daily.
"Moving forward, falling global oil prices put the possibility of lower inflation on the table, given a more direct pass-through of falling global oil prices to domestic pump prices.
"The savings from the government's subsidy bill will allow it to better dictate the direction of the fiscal deficit. If government revenue streams from oil-related revenues, GST and income tax collections remain intact, the government can re-channel the RM12 billion earmarked for fuel subsidies through BR1M cash handouts or other means of targeted assistance.
"Otherwise, the savings can be used to offset any potential declines in revenue as a result of slower growth or lower oil prices in order to keep its deficit reduction on target," CIMB Research told The Star.
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