Friday 14 Jun 2024
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KUALA LUMPUR (Jan 25): An adjustment of the fuel subsidy in 2023, albeit in a targeted measure, is expected to be on the cards in the revised Budget 2023.

In a report on Wednesday (Jan 25), RHB Research group chief economist and head of market research Dr Sailesh K Jha said Budget 2023, which will be announced on Feb 24, shows limited possibility of significant tax policy reforms and reduction of other subsidies being announced.

Malaysia is predicted to maintain a strong business cycle and core consumer price index (CPI) inflation that is decreasing (although still higher than normal) in the first half of 2023 (1H2023). Additionally, commodity prices are expected to remain steady in 1H2023 as the global economy slows.

“Our view is that the re-opening of China is unlikely to have a significant impact on economic activity in the giant economy and global growth in 1H2023, the timing is appropriate for a reduction in fuel subsidies to be announced on Feb 24,” he added.

He further added that the government is likely to highlight the targeted fuel subsidy policy to international rating agencies.   

“In the summer, international rating agencies are likely to hold discussions with the Ministry of Finance, and this is the one policy adjustment which the government can highlight to these entities to buy more time to announce and implement a significant fiscal consolidation path,” said Sailesh in the report.

He added that from a monetary policy perspective, RHB maintains the view that the overnight policy rate (OPR) will peak in the 3.0% to 3.5% range in 2023, with the balance of risks tilted towards a print of 3.00% to 3.25%.

“The uncertainty around our OPR forecasts stems from the timing, quantum, and scope of the targeted fuel price adjustment,” he stated.

He said Bank Negara Malaysia believes that inflationary pressures are widening, although moderating, and are likely to remain elevated in 1H2023 even without a fuel subsidy adjustment.

“From what we observe in close to real time as of the second week of February from our proprietary satellite images/machine learning derived data base is that consumer spending remains resilient and well above trend, while tourist arrivals are accelerating above trend.

“In addition, labour market conditions remain robust even though the economy has been slowing since 4Q2022 (fourth quarter of 2022) (which is a phenomenon we are observing in many Asian economies),” added the economist.

Sailesh added core CPI inflation will remain sticky for several months at around 0.25% to 0.50% month-on-month if a modest targeted fuel price adjustment materialises in 2023.

“The most impacted sectors initially could be the transport and food & non-alcoholic beverage sectors within core CPI inflation. The second round effects could be felt in the services sectors with the restaurants & hotels sectors relatively more impacted,” he said.

The December inflation report indicated services sector inflation on a momentum basis is up while goods inflation is moderating but is still elevated.

“In our view, the dynamics of inflation have shifted to being more demand side driven and will likely remain so in 1H2023 compared to supply side driven for most of 2022 with commodity price shocks and supply side congestions being at the forefront in terms of price pressures last year,” he stated.

December headline CPI printed at 3.8% year-on-year (y-o-y) versus the Bloomberg consensus estimate of 3.9% and the November print of 4.0%.

December core CPI printed around 4.1% y-o-y versus the November print of around 4.2%.

Edited ByIsabelle Francis
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