Higher oil price allows govt enough petrol aid

Rising crude oil prices would translate to higher revenue for the govt


THE recent improvement in global crude oil price should allow the government some breathing space to manoeuvre and provide the necessary subsidy should the fuel’s ceiling price go beyond the stipulated levels.

Analysts believe that while the higher oil price would push petrol’s retail price, the government would still have enough buffer to offset any hike.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said that rising crude oil prices would translate to higher revenue for the government.

“The general guidance for every US$1 increase in crude oil prices would translate into RM300 million in additional revenue.

“Given that there is more revenue, it would also mean the government can provide the fuel subsidies,” he told The Malaysian Reserve (TMR) in a text message.

Finance Minister Tengku Datuk Seri Utama Zafrul Tengku Abdul Aziz recently announced a new ceiling price for RON95 at RM2.05 per litre and diesel RM2.15 per litre respectively.

It was described as a necessary move to cushion the upward trend in petroleum product prices worldwide which also signals a possible world economic recovery.

RHB Research Institute Sdn Bhd said its Brent crude oil price forecasts have increased to US$57 (RM230.28) per barrel from US$51-US$55 per barrel for 2021-2022. Oil prices at local petrol stations have been steadily rising since last November.

The weekly price RON95 is now retailed at RM2, while diesel has reached the ceiling price of RM2.15.

However, Mohd Afzanizam said it is now a matter of whether the government would allocate enough resources to provide such assistance at the “tolerance level” based on the degree of fiscal deficits.

He said it would also ultimately revolve around the sovereign rating the country has been garnering.

As it is, Fitch Rating has downgraded Malaysia’s sovereign rating by one notch in December last year to ‘BBB+’ from ‘A-‘, with a stable outlook.

“But so far, the impact from the downgrade looks manageable. The foreign interests on our bond markets in particular the Malaysian Government Securities and Government Investment Issue continue to see higher participation rates at 40.5% and 6.8% respectively in January 2021.

“In that sense, there is room for the government to spend a bit more on fuel subsidies in order to keep the general prices stable,” Mohd Afzanizam said.

He also said that beyond the price capping and blanket subsidy, the government needs to have a clear plan by relooking at how subsidies should be rationalised so that it will be more targeted and yielding a favourable outcome, especially to the vulnerable group.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes said the rise in global oil prices will allow the government to cap gas prices.

However, he said the higher oil prices can be a double-edged sword.

“On one hand, it improves the government coffers. On the other hand, higher oil prices can thwart the domestic recovery,” he told TMR.

In his recent note, Innes said the oil rally is “taking a breather” after hitting new 12-month highs recently, with Brent priced at over US$61 per barrel suggesting profit-taking set in.

“Despite finding support from the large draw in the US crude stockpiles with excess inventories almost entirely gone now just 26 million barrels, 2% higher than the same point last year, oil prices could not hold into its gains.

“This is possibly due to the expectation that Saudi Arabia could roll back their unilateral February or March production cuts and that OPEC could signal more production coming back online at the March meeting, given the sizzling recovery in oil prices,” Innes said.

Meanwhile, Petrol Dealer Association of Malaysia president Datuk Khairul Annuar Abdul Aziz said industry players are now relieved after knowing that the government has agreed to cap prices for RON95 and diesel.

Read our previous report here

Higher crude oil price secures govt’s fiscal position