MIDF Expects Subsidised Fuel Prices Down To RM1.95 - Reduce Food Inflation

Bernama reported that MIDF Research, the Malaysian government is expected to lower retail fuel prices, notably for RON95 and diesel, in order to stabilise prices and lessen the burden of living costs on the people. The anticipated RM0.10 cent drop in RON95 pricing to RM1.95 per litre next month is estimated to reduce Malaysia's headline inflation to 2.9 percent in 2023. Non-food inflation is predicted to fall further to 1.3 percent, while transport expenses may fall even further to -1.7 percent.

By the end of the year, the 10 sen reduction in fuel prices will result in a reduced monthly headline inflation rate of +1.9 percent year on year (y-o-y). Furthermore, this action will provide the government with an additional RM4.31 billion in fiscal expenditure that can be used for other purposes. The better fiscal space is attributable to the fiscal debt-to-GDP ratio falling to 59.3 percent in the first quarter of 2023, from 76.1 percent in the previous quarter, including contingent liabilities.

According to the consumer price index (CPI) weightage, transport expenditures are the third-largest burden after food and housing/utilities. Given the continuous high food inflation and income pressures, the government is anticipated to lower retail fuel prices, particularly RON95 and diesel, in the near future. Malaysia's net food importer status, compounded by a devalued ringgit, makes it difficult for the government to control food inflation.

The average Brent crude oil price in the first half of 2023 was US$79.2 (RM362) per barrel, somewhat lower than the government's prediction of US$80 (RM365) per barrel. According to MIDF Research, the non-subsidised market price for RON95 is RM3.10 per litre. The fuel price differential versus the market price is predicted to be lower this year, at RM1.05 per litre, down from RM1.86 per litre in 2022, resulting in reduced total subsidy spending compared to last year.

Furthermore, the Malaysian ringgit's ongoing depreciation is seen to be one of the factors leading to the country's high food inflation. Food inflation remains elevated, indicating that food prices remain sticky on the upside despite a healthy domestic expenditure.