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Malaysia takes advantage of falling global prices

Hydrocarbon Engineering,

According to Business Monitor International (BMI), the Malaysian government is taking advantage of the falling global oil and fuel prices in the past month to continue its steady reduction of fuel subsidies, with a subsidy cut for RON95 petrol and diesel implemented in October.

Prices for the two fuels rose by US$ 0.06/ltr each. This is the second significant move to tackle fuel subsidies in Malaysia over the past four years; in Q4 2013, the government cut fuel subsidies by approximately US$ 0.06/ltr for the first time in more than two years, as part of its wider efforts at reducing its budget deficit.

Malaysia’s fiscal deficit of 4.5% of GDP was the second highest among Asia’s 13 emerging markets in 2012 according to an IISD report, coming second only to India. The country’s official target is to narrow its fiscal deficit to 3.0% in 2015, with hopes for a balanced budget by 2020. In addition, Malaysia’s national debt is widening. It is the second highest among Asian emerging markets after Sri Lanka, standing at a debt to GDP ratio of approximately 53.3% in 2012.

BMI suggests that directly tackling fuel subsidies will partially address these problems. Fuels subsidies have a high direct cost for the government, as they make up a large part of state expenditure. According to IISD, approximately US$ 7.9 billion was allocated to fuel subsidies in 2013 in Malaysia, roughly equal to 5% of total government debt in 2013.

In addition, the low cost of fuels has resulted in a large increase in domestic consumption. This has seen Malaysia become a net importer of refined fuels in 2010. Costly fuel imports have further deteriorated the country’s economic position, with domestic fuels consumption set to grow further in the coming years, if left unchecked.

Following a second, significant round of subsidy cuts, BMI has slightly revised its diesel and gasoline consumption growth forecast to the downside. Although oil consumption will remain on the uptrend, the cuts are expected to moderate the rate of oil demand growth, which BMI now forecasts at an average annual growth rate of 1.5%, compared to approximately 2% previously. Although consumption is still heavily subsidized relative to countries such as Singapore, which use market based pricing, the price increase will help correct some of the distortion and slightly reduce consumption growth in Malaysia.

In addition, the willingness of the government to push through with politically unpopular cuts to fuel subsidies boosts confidence that the country could implement further cuts in the coming years, This is reflected in the downgraded consumption forecast, which takes into account a likely progressive reduction in fuel subsidies.

Overall, the low subsidies and decreased consumption will have a positive impact towards government finances. According to government calculations, the September 2013 round of subsidy cuts saved approximately US$ 1 billion in a year. A similar level of savings could be expected after the October 2014 cut.

Reduced fuel consumption will also positively impact the country’s refining fuels trade balance, by reducing Malaysia’s import needs. With a moderated rate of consumption growth and the construction of the 300 000 bpd RAPID refinery, BMI now forecasts that Malaysia will be a small net refined fuels exporter from 2020 onwards, further boosting government finances.

However, BMI maintains that the implemented cuts are not yet sufficient. Fuel subsidies in Malaysia remain one of the heaviest when compared to other south east Asian countries. Business Monitor estimates that the subsidies that remain following the partial reform amount to approximately US$ 0.19/ltr for diesel and approximately US$ 0.14/ltr of RON95. As such, further cuts will be necessary. However, the government’s decision to follow through with the second large scale round of cuts reinforces the view that a progressive roll out of cuts is likely in the coming years.

Adapted from a report by Emma McAleavey.

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