RON95 Subsidy Plan To Benefit Majority, Mitigate Inflationary Pressures - Investment Banks

KUALA LUMPUR, July 24 (Bernama) -- The government's plan to reduce the price of RON95 petrol is widely seen as a positive step to ease living costs and support private consumption amid global economic uncertainties, said investment banks.

Prime Minister Datuk Seri Anwar Ibrahim indicated that the price of RON95 would be set at RM1.99 per litre for MyKad holders, down from the current RM2.05 per litre, benefiting an estimated 18 million car and motorcycle users.

MBSB Investment Bank Bhd (MBSB IB) said the move would help ease transportation costs for the public and reflects the administration’s commitment to sharing the fruits of economic growth with the people, especially in light of ongoing global challenges.

"Savings from the reduced spending on fuel, together with the recent monetary policy easing, could be redirected to support other areas of consumption.

"The unutilised subsidy allocation allows the government to reduce the RON95 price, which is expected to take effect later in the year," it said in a note today.

MBSB IB also expects that no additional government borrowings will be required, as the additional fiscal spending will be covered by higher revenue collection and redirected savings from unutilised allocations.

"The reduction in the subsidised RON95 petrol price carries implications for inflation, affecting both supply and demand dynamics. This move is expected to help mitigate inflationary pressures, which have previously posed downside risks to economic forecasts," it said.

Meanwhile, Hong Leong Investment Bank Bhd (HLIB) said the one-off RM100 cash transfer, along with the lower RON95 petrol price for the majority of Malaysians, would support private consumption.

“Assuming the full RM100 is spent to realise its intended benefit, we estimate the RM2 billion outlay could increase private consumption growth by approximately 0.2 percentage points (ppt)," it said.

On the potential fiscal deficit impact, HLIB estimated that the RM2 billion cash transfer translates to 0.1 per cent of gross domestic product (GDP).

CGS International Securities Malaysia Sdn Bhd opined that the lower pump prices for the masses would be funded by excluding higher-income earners and foreigners from the subsidy, as well as reducing RON95 smuggling.

"While the exact details of the RON95 subsidy rationalisation will only be announced on Sept 25, we believe it may exclude higher-income earners and foreigners from the subsidised price, requiring them to pay the market rate instead.

"Alongside a potential reduction in RON95 smuggling, similar to what was experienced when diesel subsidies were retargeted last year, we believe this will help fund the lower pump prices for the masses," it said.

Echoing the same sentiment, Kenanga Investment Bank Bhd said the current unsubsidised market price stands at around RM2.50 per litre, representing a 22 per cent premium over the capped rate.

"In both 2023 and 2024, RON95 subsidies cost the government an estimated RM20 billion annually. Excluding high-income earners and foreigners from subsidies could save the government up to RM8 billion.

"In addition, we suggest that, to preserve fiscal space, the government could introduce Sales and Service Tax (SST) on premium fuels such as RON97 to help offset rising subsidy costs and fund growth initiatives," it said.

-- BERNAMA