Economic Insight
2013/44 | 18 OCTOBER 2013
Pre Budget 2014: Subsidy Rationalization: More to come!
What is subsidy rationalization?
TABLE 1: FEDERAL GOVERNMENT FINANCE
RM billion
Revenue
Operating Expenditure
Surplus/Deficit
Development Expenditure (net)
Overall Surplus/Deficit (-)
% of GNI
2011
185.4
182.6
2.8
45.3
-42.5
-4.9
2012 1H 2013
207.9
95.3
205.5
99.1
2.4
-3.7
44.3
15.6
-42
-19.4
-4.6
-4.3
•
Subsidy rationalization is a programme where the
government of Malaysia will gradually and carefully increase
the prices of subsidized items such as energy and food to
reduce its spending on subsidies. The subsidy expenditure
forms a significant part of the operating expenditure in the
National Budget. In the Economic Report 2012/2013 by the
Ministry of Finance, total subsides were estimated at RM37.6
billon while operating expenditure at RM201.9 billon,
representing almost 19% of overall operating expenditure
in 2013.
•
In 1H13, we noticed expenditure on subsidies to have
reached RM16.9 billion or 17.1% of the total operating of
expenditure. Last year, subsidies registered RM44.1 billion
(21.4% of total operating expenditure) and in 2011, it was
RM36.3 billion (19.9% of total operating expenditure). A
large portion of the subsidies have been for energy.
•
According to the latest available data from CEIC, in 2011
the government had spent RM20.4 billion on energy subsidies
alone. This had represented 56% of total subsides
expenditure, 11% of total operating expenditure and almost
9% of total expenditure! Moreover, in the last three years
(2011-Oct.14, 2013), we have witnessed crude oil price
(Nymex) average trending upwards to an average $95.70
per barrel against 2008-Oct.14’13 average of $56.63 per
barrel. Hence, making the case for more energy subsidy
removals going forward.
•
However, if the subsidy removal is too large, then the price
hike would be a negative shock to the economy where both
consumption and production would contract. Hence, output
would slow and subsequently, moderate growth. This makes
the case for a careful and gradual lifting of subsidies to
ensure that growth is sustained amidst the still soft global
demand for Malaysian goods.
Source: MOF 2012/2013 Economic Report
TABLE 2: FEDERAL GOVERNMENT OPERATING EXPENDITURE
RM billion
Emoluments
Subsidies
Grants & transfers
Supplies & services
Debt service charges
Pension & gratuities
Asset acquisition
Other expenditure
Total
2011
50.1
36.3
32.2
28.9
17.7
13.6
2.7
1.1
182.6
2012 1H 2013
60.0
28.8
44.1
16.9
32.6
21.1
32.0
13.3
19.5
9.8
14.1
8.0
1.8
0.2
1.5
0.9
205.5
99.1
CCOUNT AND
TRADE BALANCE
% share
Emoluments
Subsidies
Grants & transfers
Supplies & services
Debt service charges
Pension & gratuities
Asset acquisition
Other expenditure
Total
27.5
19.9
17.6
15.9
9.7
7.4
1.5
0.6
100
29.2
21.4
15.9
15.6
9.5
6.8
0.9
0.7
100
29.0
17.1
21.3
13.4
9.9
8.1
0.2
1
100
Source: Bank Negara Malaysia
TABLE 3: GOVERNMENT SUBSIDIES FOR CONSUMER GOODS
Product
Actual Price Controlled Price Subsidy by Gov
Ron 95/litre
RM2.79
RM2.10
RM0.69
Diesel/litre
RM2.73
RM2.00
RM0.73
LPG 10kg/barrel
RM33.95
RM19.00
RM14.95
LPG 12kg/barrel
RM40.74
RM22.80
RM17.94
LPG 14kg/barrel
RM47.53
RM26.60
RM20.93
Flour/kg
RM2.06
RM1.35
RM0.71
Coarse Sugar/kg
RM2.84
RM2.50
RM0.34
Cooking Oil/kg
RM4.75
RM2.50
RM2.25
Source: KPDNKK Website
TABLE 4: FISCAL BURDEN FROM THE GOVERNMENT SUBSIDIES
Product
Sugar
Flour
Cooking Oil
2012
RM0.48 billion
RM0.16 billion
RM1.60 billion
2013 (Estimate)
RM0.55 billion
RM0.15 billion
RM1.60 billion
Rice ST 15
Petrol Ron 95
Diesel
LPG
Total
RM0.53 billion
RM0.53 billion
RM24.02 billion
RM18.36 billion
RM26.79 billion
RM21.19 billion
Source: KPDNKK Website
}
How much do we spend on subsidies?
•
An examination of the subsidy budget on the KPDNKK website
as of August this year, we find that food and energy subsidies
were estimated at RM22.29 billion under Budget 2013. This
is still a large amount - 11% of total operating expenditure
- and a burden to the country since the amount would only
be on an increasing trend when global food and oil prices
increase over time as the global economy picks up. It could
end up being unsustainable if Malaysians remain artificially
shielded from rising global market prices.
What are the food and energy items currently being
subsidized? See Chart 1.
DISCLAIMER: This report is for information purposes only. We have based the data and information in these reports from sources we believe to be reliable. However, we do not guarantee
as to the accuracy or completeness of the information provided. Any recommendation or opinion that is provided in this document, if any, does not have regard to the investment objective
and particular needs of any specific addressee. No parts of this publication may be reproduced or redistributed in any form or any means whitout a prior written permission of the publisher.
TABLE5:4:GAS
GASSUBSIDIES
SUBSIDIESGO
GOTO
TOCONSUMER,
CONSUMER,NOT
NOTINDEDPENDENT
INDEPENDENT POWER
TABLE
POWER PRODUCERS
PRODUCERS (IPPs)
(IPPs)
GAS
RNAL DEBT POSITION
Govt
subsidy
RM8-12B
annually
Generation
TNB and IPPs
Single Buyer
TNB
Transmission /
distribution by
TNB
Electricity tariff
* IPPs pass gas cost to single buyer [TNB]
*IPPs are not beneficiaries of gas subsidies
*Gas is subsidized to reduce production
cost of electricity hence lower tariff
Households
Industries
Govt regulated
Saving from gas subsidy passed
to consumers through lower
tariff
Source: Business Times, September 16.
TABLE 6: HISTORICAL SUBSIDY RATIONALIZATION
16-Jul-10
RON 95
Diesel
LPG
Sugar
4-Dec-10
RON 95
Diesel
LPG
Sugar
10-May-11
Sugar
1-Jun-11
Power sector (RM/mmbtu)
Industry (RM/mmbtu)
Electricity (RM/kwh)
29-Sep-12
Sugar
3-Sep-13
RON 95
Diesel
Subsidy Reduction
5 sen
5 sen
10 sen
25 sen
Our view of the subsidy rationalization
•
We expect the subsidy rationalization programme to
continue with the following price hikes:
o Gas: LPG (+5 sen per kg)
ƒ Last hike: 4th Dec., 2010
o Electricity tariff: RM (+ 2-3 sen per kWh)
ƒ Current tariff: Average 39.33 sen per kWh
for 9 - tier domestic tariff pricing
ƒ (Range: 21.8 sen – 45.4 sen) (TNB website)
ƒ Last hike:1st June, 2011 for both individual
and commercial rates.
o Food: Sugar hike (+20 sen)
ƒ Last hike: 29 th Sept., 2012
•
We do not discount the rise in Ron 95 price if crude oil were
to spike higher than expected on higher demand.
5 sen
5 sen
5 sen
20 sen
20 sen
RM3.00
RM2.65
Avg +7.12%
20 sen
20 sen
20 sen
Rationale:
•
We selected the above items especially for i, ii, and iii since
there had been a pause since their prices were last
increased.
•
Second, we selected sugar given that one in five Malaysians
is reported to be diabetic. This would give the government
a moral upper hand since it has “medical grounds” for lifting
the sugar subsidy. Even public economics textbooks attribute
the era of cheap food to rising obesity in the U.S. (See
Chapter on “Expanding Waistlines”, in Miller et al, 2008).
This year the government is to spend an estimated RM551
million on sugar subsidy alone. That would amount to 2.6%
of overall food and energy subsidy estimated at RM 21.19
billion for 2013.
•
With a modicum of knowledge of science, we understand
consuming “flour” would have the same effect on raising
blood sugar but flour’s widespread use in food such as
noodles, bread, and pastries would have a bigger impact in
accelerating inflation. It is estimated that the government
is to spend RM150 million on flour subsidy this year. But
then, flour makes up only 0.71% of total subsides in 2013.
Hence, repealing the sugar subsidy would make more sense
than flour at this juncture.
•
This year, it is estimated that the government will spend
RM18.36 billion on energy subsidies alone which represents
86.65% of total subsidies. Although it makes a lot of sense
to increase petrol prices further but given the recent hike in
energy prices in September, we expect the Ron 95 price
would only be increased if global crude prices were to surge
pass the government’s expectation. Crude oil prices are
currently still moderate, given the still sluggish global growth.
Source: KPDNKK Website
•
Sugar, flour, cooking oil, Ron 95 petrol, diesel and LPG.
What about Ron 97 and sin taxes?
•
Ron 97 is not in the subsidy list and its increase in price
would not fall under the subsidy rationalization programme.
The same applies to sin taxes which normally refer to
cigarette ad alcohol taxes. When the government increases
the price of cigarettes, it does not fall under subsidy
rationalization since cigarettes are not subsidized in the first
place. Ditto for alcoholic beverages.
What of the remaining almost RM15 billion (RM37.6 billion–
RM22.9 billion) in subsidies?
•
According to a Business Times news report an estimated
RM8 billion to RM13 billion in subsidies go to independent
power producers (IPPs) and oil companies (The truth about
subsidies, Business Times, Sept. 16, 2013). Even if
corporations’ subsidies were removed, Malaysia would still
not be able to continue to subsidize the public. This is
because the independent power producers pass the subsidies
in terms of lower prices to consumers. Gas, for example, is
subsidized to reduce production cost of electricity, hence
the lower tariffs. In other words, the government regulated
electricity tariffs supplied to households and industries are
subsidized and savings to corporations are passed to
consumers.
DISCLAIMER: This report is for information purposes only. We have based the data and information in these reports from sources we believe to be reliable. However, we do not guarantee
as to the accuracy or completeness of the information provided. Any recommendation or opinion that is provided in this document, if any, does not have regard to the investment
objective and particular needs of any specific addressee. No parts of this publication may be reproduced or redistributed in any form or any means whitout a prior written permission
of the publisher.
•
•
•
The IMF’s latest global forecast is based on the simple average
of prices of U.K. Brent, Dubai Fateh, and West Texas
Intermediate futures markets price of $104.49 in 2013 and
$101.35 in 2014. If global crude oil price were to exceed
these thresholds, the government could raise Ron95 prices
next year.
OPEC in its Monthly Oil Market Report Sept 2013 revised its
world oil demand growth in 2013 slightly by 25 thousands
barrel per day tb/d to stand at 0.82mb/day – reflecting
positive signs of improvement in developed economies.
We are mindful of the hints given out by the various
government officials in the media. As such, the pause in
subsidy rationalization programme of subsidized goods as
well as the media reports had brought us to our list of goods
for subsidy removal in Budget 2014.
•
The government would need to make the necessary price
adjustments in 2014 before the advent of the Goods and
Services Tax (GST) widely expected in 2015. Most economists
are expecting the rate to be at 4%, a level deemed optimal
to increase government revenue, without contracting
domestic demand (consumption plus investment) significantly
in the short-run so as to impede growth in the year of its
implementation.
•
However, the combination of a series of subsidy
rationalization together with GST within the same year would
pose as a downside risk to the Malaysian economy. This is
because it would slow domestic demand which continues to
be the engine of growth for the domestic economy at a time
of soft global external demand. Moreover, we are expecting
the Overnight Policy Rate (OPR) to be increased by 25 basis
points in May or July next year on account of higher overall
prices but provided that growth is sustained. Lest we forget,
under the New Economic Model (NEM) private investment is
to lead growth.
promote an egalitarian society. Subsequently,
growth would be more equitable and thus,
deemed sustainable. Also, giving out the BR1M in
two batches would promote spending as opposed
to one lump sum which promotes savings.
•
•
•
•
KR1M: To increase the number of Kedai Rakyat 1Malaysia.
1Malaysia Products: To introduce more 1Malaysia
products at petrol stations and supermarkets.
Book voucher at RM300 for university students.
This would be a significant help to local university students.
The Student Assistance programme amounting to
RM100. This is a significant help in terms of alleviating
the burden of parents with school-going children.
Inflation Forecast 2014
•
Inflation expected to accelerate within the range of 3.3%3.6% next year. (Note: assuming a 0.3% m-o-m increase
to the CPI basket in every month, we expect inflation to
average at 3.6% y-o-y in 2014)
Measures to maintain standard of living
•
•
To cushion the rise in overall prices, we expect the following
measures to be implemented:
Possible introduction of RON 92 as a cheaper fuel
option.
o Caveat: It has been reported that not all vehicles
would be able to benefit from the introduction of
the RON 92 petrol since it was phased out in 2009
and its usage would be predominantly by
motorcycles.
o Comment: We do not think this would be viable since
it would incur a high operating cost to petrol station
operators as well as problems with market
perception.
o BR1M is expected to be increased to RM1200
(earlier RM500) in Budget 2014 and would be
effective next year. Both male and female heads of
families would receive half the share of the BRIM to
ensure that women would have equal access to the
BR1M.
o Comment: This move by the government shows
gender sensitivity as well as justice and would be
DISCLAIMER: This report is for information purposes only. We have based the data and information in these reports from sources we believe to be reliable. However, we do not guarantee
as to the accuracy or completeness of the information provided. Any recommendation or opinion that is provided in this document, if any, does not have regard to the investment
objective and particular needs of any specific addressee. No parts of this publication may be reproduced or redistributed in any form or any means whitout a prior written permission
of the publisher.