Low Oil Prices Present Opportunities and Risks for Policymakers in Malaysia

CEIC Macro Watch Global #44 - May 29, 2015 Lower global oil prices are presenting new opportunities for policymakers, not least in terms of altering fuel subsidies. Previously, Malaysian fuel prices were heavily subsidised to protect consumers from fuel price volatility and to help reduce the household cost of living. However, the rising subsidy bill has placed increasing strain on the government’s budget as the annual fuel subsidy bill reached MYR27.9 billion during 2012 from MYR20.4 billion during the previous year. The global decline in oil prices has presented an opportunity for the government not just to reduce its subsidy bills, but to also move towards more market-based pricing. Under its revised “managed float” system, retail fuel prices will be benchmarked based on the Mean of Platts Singapore (a widely followed price indicator for transactions of petroleum products) by taking the average price for the previous 10 or 11 days of each month, inclusive of a fixed margin for oil companies and retailers. While sales tax allowance will be retained (to a point), fuel subsidies are eliminated, providing huge savings for the administration and hence aiding fiscal consolidation. Central bankers may also enjoy a respite from policy tightening as the decline in oil prices has helped to relieve inflationary pressures. Malaysian inflation moderated to just 0.9% YoY during March 2015, its lowest level in five years, and a stark contrast from the 3%-3.5% inflation rates observed during the first half of 2014. Indeed, strong domestic demand previously prompted Bank Negara Malaysia (the central bank) to raise its overnight policy rate (OPR) by 25 basis points to 3.25% for the first time in three years to temper inflationary pressures and mitigate the potential risks of financial imbalances. While the central bank’s decision has played a significant role in relieving inflationary pressures, the deflation in fuel and lubricants (comprising 8.77% of the consumer price index) during the first three months of 2015 decisively pushed inflation downwards. The newly introduced Goods and Services Tax (GST) of 6% may nudge inflation upwards in subsequent months, but the relief from lower oil prices (and indeed, commodity prices in general) may help to offset the inflationary impact of the GST. However, among these opportunities lie teething problems, especially given the potential for reversals. The inflation rate spiked to 1.8% in April 2015 largely due to the GST and will likely approach its projected five year average of 2% over the coming quarters. While these are comfortable territories for inflation, keeping it that way hinges on the continued low oil price scenario. Policymakers must also tackle potential downward adjustments to consumption given the introduction of the GST and its implications on the real economy; the consumer sentiment index slipped to 72.6 points during the first quarter of 2015 from 83.0 points in the previous quarter (100 being the neutral point). On the flip side, as a net petroleum oil exporter, persistently low oil prices may not necessarily bode well for Malaysia’s external sector. By Ian Lim in Malaysia - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
29th May 2015 Low Oil Prices Present Opportunities and Risks for Policymakers in Malaysia