RON 95 Subsidy Rationalisation To Drive Malaysia's Fiscal Consolidation, Upside Risk Remains - Stanchart

KUALA LUMPUR, Oct 19 (Bernama) --  The government’s RON 95 subsidiy rationalisation plan will drive Malaysia’s fiscal consolidation, however, the subsidy cost will face some upside risks if oil prices rise, according to Standard Chartered (Stanchart).

The banking group said the fuel subsidy rationalisation is expected to result in RM8 billion in annual savings, but only RM4 billion in 2025 as the implementation is planned for mid-year.

“The bottom 85 per cent of income earners will remain eligible for the RON 95 subsidy at a cost of RM12 billion per annum, based on the government’s oil price assumption of US$75-80 per barrel.

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“Based on the Brent crude oil price of US$80 per barrel, Stanchart estimates the annualised inflationary impact of the RON 95 subsidy rationalisation at 0.3 percentage points (ppt) (or 0.15 ppt for half-year),” it said in a statement today.

The bank said it is difficult to estimate the impact on inflation of targeted subsidy rationalisation for public health care and boarding schools at this point.

Similar to 2024, the government has provided a wide 2.0-3.5 per cent inflation forecast range for 2025 to account for potential subsidy changes, the bank noted.

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“The 2024 inflation forecast range was narrowed to 1.5-2.5 per cent (from 2.1-3.6 per cent) on lower-than-expected inflation year-to-date,” it said.

Stanchart also maintains its view that Bank Negara Malaysia is likely to look past any one-off increases in inflation due to subsidy rationalisation, with the risk biased towards one more hike if second-round inflationary effects take hold.

The bank sees the increase in minimum wage, effective in February 2025, to bolster the country’s consumer spending in 2025.  “The wage increase is a key thrust of the 2025 budget, to that end, the government allocated RM105.9 billion to emoluments – a 6.2 per cent increase from 2024, as basic civil servant salaries are raised between 7-15 per cent,” it said.

-- BERNAMA