The return of fuel subsidies in Asean: Maybank Kim Eng

Tuesday, July 3, 2018 - 17:41
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Amid upcoming elections and rising global oil prices, several Asean governments - Malaysia, Indonesia and Thailand - have since reintroduced fuel subsidies. Here is all you need to know about the fuel schemes and their potential impact and risks, according to Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye. .  


1. Malaysia

The RON95 retail price and diesel retail price in Malaysia will be fixed at RM2.20 (US$0.54) per litre and RM2.18 per litre respectively, while the RON97 price will be floated on a weekly basis.

An amount of RM3 billion (0.2 per cent of GDP) will be allocated for fuel subsidies until end-2018. This amount is small when compared to RM28.9 billion (2.8 per cent of GDP) in 2014 before the abolishment of fuel subsidies. Still, the return of fuel subsidies will contribute to fiscal deficit risks as the GST has been cut to zero.

Fortunately, Malaysia is a net oil and gas exporter and hence, a major beneficiary of rising oil prices. A US$10 increase in global oil prices should roughly translate into about RM7 billion to RM8 billion increase in oil-related revenue.

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Petronas should be in a stronger financial position to increase dividends this year, given the recovery in global oil prices. The firm had cut dividends to the government to a ten-year-low of RM16 billion in 2016 and 2017 as oil prices plunged during this period. Higher actual global oil prices now could potentially see dividends come in close to RM25 billion. Reintroducing fuel subsidies and raising dividends may leave less room for capex spending, which has been declining for the past two years.

2. Thailand

Thailand’s Bt31 billion (US$969 million) State Oil Fund will help absorb 50 percent of any increase in retail diesel prices. The government capped the retail diesel price at Bt30 per litre.

Net assets of the State Oil Fund appear sufficient to fund the fuel subsidy. The subsidies are targeted to help lower-income households and transport operators, and will likely stay until the Elections scheduled for February next year. Impact on fiscal and current account will be small as the fund can comfortably fund the subsidies, while the current account is in a huge surplus (10.6 per cent of GDP).

Prices of liquefied petroleum gas (LPG) for household cooking are also capped at Bt363 per 15kg cylinder, using funding from the Cooking Gas Fund (CGF) that is expected to cost about Bt346 million per month. With only Bt392mn in the CGF currently, it is expected to run dry within a month.

3. Indonesia

Of the three countries, risks are highest in Indonesia, given a widening oil-trade deficit and the pressure on the rupiah.
The government is doubling fuel subsidies for solar diesel to Rp 2,000 (US$0.14) and capping its subsidised gasoline and diesel prices at Rp 6,450 and Rp5,150 per litre respectively. Capping fuel prices is a populist policy aimed at securing voter support in the Elections scheduled for April 2018.

In the current episode, fuel subsidy costs (estimated at 0.8 per cent of GDP) are manageable, but increasing. Rising global oil prices could continue to escalate fuel subsidy costs, widen the trade deficit and further pressure the rupiah.

The oil-trade deficit is worsening as fuel imports outweigh exports. The deficit widened to US$8.6 billion in 2017 from US$5.6bn in 2016 - the biggest gap since the US$13.4 billion deficit recorded in 2014. It is estimated that the deficit could widen to about US$11 billion this year. This is a key concern as Indonesia’s trade balance has recorded three consecutive months of deficits.

Several of Indonesia’s sharp market sell-offs and aggressive tightening cycles in the past were a result of sharp fuel price hike episodes. Escalating fuel subsidy costs and oil trade deficit were often a pre-cursor to eventual fuel price hikes.


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