KUALA LUMPUR (Sept 27): Targeted fuel subsidies could hit the middle-income group (M40s) the hardest, as the top 20% income earners (T20) will be better able to absorb the higher fuel costs while the bottom 40% households (B40) will be eligible for handouts to buffer the resulting higher inflation, said an analyst and economist.

The rollout of targeted subsidies will be underpinned by the government’s Central Database System (Padu), which is 60% completed with a targeted launch date in January.

It takes into account a number of indicators beyond incomes, such as number of households, dependent children according to education levels, location, number of vehicles, records of assistance received from government departments and other information that can help determine the disposable income of each household.

During a debate on the Mid-Term Review of the 12th Malaysia Plan (12MP) in Dewan Rakyat on Sept 19, Economy Minister Rafizi Ramli said that the Padu system provides a combination of socio-economic information for every household in the country, which is an important tool in implementing the targeted subsidy programme and minimising the occurrence of marginalised risk groups.

“The approach taken through Padu to identify eligible groups will reduce inclusion and exclusion errors by creating a centrally-based integrated database to help the government make decisions based on data,” he said.

Kenanga Research analyst Cheow Ming Liang, in a consumer sector update on Wednesday, said many middle-income households who benefitted from the government's subsidised fuel could be excluded from the targeted fuel subsidy programme, which will crimp their spending power.

While the upper-income group is not expected to see much impact from the removal of the blanket fuel subsidy, the middle-income group might see their disposable income levels diminish.

On the other hand, the lower-income group sector will still enjoy fully subsidised fuel and hence there is no erosion to the group’s spending power.

“In addition, the group will continue to receive financial assistance from the government including cash handouts,” he said.

Cheow added that the government is expected to use Padu to identify recipients using a “net disposable income” criterion, intending to largely exclude the T20 demographic, the research firm said.

When contacted by The Edge, Cheow said: “When the government implements the targeted fuel subsidy, it may likely drive up the inflation higher (at least in the short term), thus the M40 will likely be squeezed,” he said.

Meanwhile, executive director of the Socio-Economic Research Centre Lee Heng Guie said the targeted subsidies will impact all income groups to a varying degree, with the high and middle-income earners — particularly those at the higher end of the group — to be hit hardest.

"We expect the targeted subsidy rationalisation will be implemented gradually and at [a] measured pace to soften the price and income impact. Additional cash assistance will be given to ease the burden on the targeted group, mainly low-income and mid-tier income households, depending on the ‘threshold’ of eligibility based on the principle of needs and income as identified in Padu.”

Cheow said the government will unveil targeted fuel subsidies during the tabling of Budget 2024 in Parliament on Oct 13, 2023, to replace the existing blanket fuel subsidy. The new policy is likely to start on Jan 1, 2024.

Crude oil production cuts made by the Organization of the Petroleum Exporting Countries (Opec) and its allies have seen crude prices skyrocket in the last 10 months. (Brent crude at US$94.93, WTI at US$91.59 per barrel).

According to Rafizi, the subject of targeted subsidy is unavoidable when it comes to the big shift that needs to be done to strengthen the country’s fiscal position.

“In 2022, the government bore a bulk subsidy of over RM80 billion, for RON95 petrol, diesel, liquefied petroleum gas (LPG) and electricity. Today the price of world crude oil reached US$95 per barrel and will soon reach US$100 per barrel.

“At that price (US$100), the subsidy borne by the government could exceed RM100 billion a year,” he said when winding up the debate on the Mid-Term Review of 12MP in Dewan Rakyat on Sept 19.

In 2022, the government’s subsidy for petrol, diesel and liquefied petroleum gas amounted to RM50.8 billion, of which 35% was enjoyed by the T20 group, while 41% was enjoyed by the M40 group and 24% by the B40 group.

Maybank Investment Bank in a research note on Sept 24 said that the implementation of targeted subsidy is a progression of other targeted programmes done this year.

Earlier this year, the electricity subsidy was given only to domestic and low-voltage users versus non-domestic (industrial, commercial) and medium/high voltage users.

This was followed by the exclusion of very high-income households from electricity subsidies at the start of 2H2023, particularly those with monthly electricity consumption excess of 1,500kWh.

“Next is the implementation of a targeted fuel subsidy in 2024 that will also end the ‘benefits’ to the high-income households,” Maybank IB said.

The MIER Consumer Sentiment Index (CSI) has followed a declining trend for two straight quarters, dropping below the pivotal 100-point mark, said Cheow.

This shows that consumers are adopting a more cautious spending stance, influenced by escalating inflationary pressures and augmented interest rates.

“Concurrently, the Retail Group Malaysia (RGM) has revised their annual growth forecast for the CY23 retail industry downwards to 2.7%, a decrease from the previous 4.8%, following a disappointing 2QCY23 performance with a -4.0% growth rate,” said Cheow.

He added this decline was largely due to subdued sales during the Hari Raya season and a high base effect.

However, some respite was seen for consumer staples players from easing prices of some soft commodities, ushering in margins recovery, he said, adding prices of some key soft commodities have been softening in recent months including milk, wheat and corn, as well as freight costs.