Malaysia to pay RM28 billion in fuel subsidies by 2022 – five times higher than RM5.3 billion allocated in Budget 2022
The Malaysian government is likely to spend RM28 billion in fuel subsidies this year if crude oil prices sustain above $100 a barrel. While the government could derive a larger sum from oil revenue, this year’s fuel subsidy bill could be five times higher than the RM5.3 billion allocated under Budget 2022, KAF Research found, Star reported.
“Based on the analysis above, the government will receive higher oil revenues amounting to approximately RM57 billion this year from RM44 billion estimated under Budget 2022 at current oil prices of around $109.20 (458 RM) per barrel, 65.5% higher than the 2022 Budget Assumption of US$66 (RM 277) per barrel,” said KAF Research.
However, this means the government will also incur a subsidy bill of RM28 billion, while a larger-than-expected subsidy increase of RM22.7 billion will outstrip a RM13 billion increase in oil revenues, it said; As a result, higher oil prices could have a net negative impact on the country’s fiscal situation “to the extent that an oil price increase of US$10 (RM42) per barrel would increase the fiscal deficit by 0.1 % of gross domestic product (GDP)”, read KAF Research Report.
High-grade gasoline prices continuously increase. During the week of March 17 to 23, 2022, RON 97 is available for RM4 per literwhen Petrol RON 95 still at the limited price of RM 2.05 a liter; The retail price of diesel is similarly capped, with 5 Euros B10 and B20 at RM2.15 per liter, and Euro 5 B7 diesel at RM2.35/litre.
According to sensitivity analysis by KAF Research, every US$1 increase in the price of Brent crude oil (RM4.19) means an increase of RM300 million in government revenue. However, the same increase would also increase the subsidy bill by RM40 million, meaning “the net financial impact is negative RM140 million for every $1 oil price increase per barrel, after subsidies exceed breakeven point in the US. $55 (RM231) per barrel,” the report said.
When the average oil price reached US$70.85 (RM297) per barrel last year, the government spent RM11 billion in subsidies; last month saw Brent oil prices rise above US$100 (RM419)/barrel last month, the highest level since 2014, following Russia’s military invasion of Ukraine from 24 February, Star reported. Russia is the world’s third largest oil producer after the United States and Saudi Arabia.
The research firm maintains a fiscal deficit estimate of 6% GDP for 2022, as the government has several options to cover the shortfall between RM7 billion and RM10 billion based on average oil price estimates from 90 USD to the US. $110 (RM462) per barrel, Star reported.
KAF Research says the Malaysian government has two options at this point; it could go back to the previously shelved targeted subsidy program, and remove the fuel price cap, or raise the fuel price ceiling to an “acceptable level between RM2.80 and RM3. RM 00/liter,” suggested the research firm.
“Prior to the announcement regarding targeted fuel subsidies, we expected Bank Negara Malaysia to begin interest rate normalization in the second half of this year,” the research firm report said. at the end of the year with an increase of one to two times”.
ONE one-time cash payment A support program up to RM625 has been introduced by the Malaysian government, and fuel prices are also floating. Fuel subsidies were abolished in 2014 and prices are based on an automatic pricing mechanism instead, however, fuel subsidies were reintroduced in 2018, with RON 95 gasoline and diesel prices for the second time. respectively at RM2.20 and RM2.18/liter.
