Msia’s subsidy re-targeting and reforms

MoF is expecting the inflation rate to range between 2.1% and 3.6% for 2024 


HEADLINE inflation has trended lower for Malaysia and globally in line with moderating cost conditions, food prices and energy or transport. Trends in shelter costs were mixed globally, but generally stayed elevated and remained a major contributor to inflation among some majors. 

Moving forward, Malaysia’s inflation outlook remains highly susceptible to developments in subsidy rationalisation measures, global commodity prices and financial market developments. 

The Finance Ministry (MoF) expects the inflation rate to range between 2.1% and 3.6% for 2024, with the balance of risks, in our opinion tilted on the upside, especially on the back of the subsidy retargeting plan. 

Sequencing of reforms to smoothen impact on the economy

Economy Minister Rafizi Ramli has recently said that the government will roll out the targeted RON95 subsidy in 2024, we thought that it is only timely for us to address the potential impact of the subsidy cuts and price controls on prices and government coffers, with a focus on chicken or eggs, electricity and fuel, which have been announced. 

Just a recap, price control for chicken has been removed since Nov 1 but it has been delayed for eggs. We are pencilling in a tiered cut in electricity subsidies at the end of the first quarter (1Q) but have not factored in the impact from RON95 at this juncture pending more clarity on timing. 

Minimal impact from the removal of chicken and egg price controls. 

The removal of the price ceiling for chicken is expected to have minimal impact on inflation as it is currently sold close to market price (October: RM10.02 versus ceiling: RM9.40 per kg).
In any case, the weightage of 

fresh meat is relatively small at 1.9% of the Consumer Price Index (CPI) basket, and as such, we have maintained our CPI readings to remain sub-2% in the next few months. Eggs, meanwhile, account for 0.4% of the CPI basket, and together, the removal of the price ceiling for both is also expected to save the government RM3.8 billion in government coffers. 

Tiered subsidy removals for electricity

In June 2023, the Natural Resources, Environment and Climate Change Ministry announced that the top 1% of electricity users in the country will pay a higher tariff between July and December 2023. This will affect 83,000 consumers who will face a minimum monthly increase of RM187 (+25%) in electricity bills. 

In August, inflation for the housing, water, electricity, gas and other fuels of the CPI basket (2.7%) jumped 0.5% month-on-month (MoM), but overall inflation accelerated only slightly by 0.1 percentage points (ppt) to +0.2% MoM. Headline inflation remained unchanged at +2% year-on-year. 

The latest move is in line with the government’s target to lift part of the subsidy for the highest 10% of electricity consumption, but at the same time, maintaining the same subsidy for 90% of consumers. 

As it is, 10% of consumers with the highest electricity consumption enjoyed 50% of the subsidy, while 50% of the consumers with the lowest electricity consumption enjoy only 10% of the subsidies provided. 

For 2024, this targeted approach is expected to save over RM4.6 billion of the projected electricity subsidy of RM20 billion in 2024. 

Expect a cut in diesel subsidy in 1Q, fuel in 2H

In Budget 2024, the government also reiterated its intention to rationalise diesel prices in phases to prevent leakages. The price of subsidised diesel will, nonetheless, continue to be enjoyed by selected segments such as freight transport. We are expecting this to happen in 1Q and it is expected to save the government RM4 billion in coffers and expected to send inflation upwards by 0.3ppt, ceteris paribus. 

Rafizi also said that the government will roll out the targeted RON95 subsidy measures in the second half of 2024. We have not factored this into our CPI calculation of 2.2% for 2024, but fuel as a whole, accounts for 8.5% of CPI calculation. Thus, every 10% increase in fuel prices could potentially send inflation up by approximately 0.9ppts, ceteris paribus during that month. 

We expect the top income group to be affected but the impact on saved government coffers will be greater. The latest available data from 2009 showed that the top 20% of the income group received 42% of fuel subsidy that year. 

News reports subsequently reported that the top 20% of the income group (T20) received 53% of blanket fuel subsidies, quoting Rafizi. 

Assuming the status quo and based on RM23.1 billion spent on RON95 subsidies in 2022, this could potentially save the government RM9.8 billion to RM12.2 billion although we expect the impact to be milder given that the wealthy segment may prefer to use premium fuel, RON97 which is no longer subsidised. 

Impact on household spending disproportionate

While the cut in subsidies and consequently, higher prices pose challenges for households, the impact varies from one income group to another. The bottom 40% of income group households have a higher marginal propensity to consume and spend relatively more on food (35% of monthly consumption expenditure) as opposed to the middle 40% of the income group (30%) and T20 households (23%). 

Thus, if price pressures are driven by food items, cost of living pressures are disproportionately experienced by lower-income households. The pandemic has brought about weak income growth and the gig economy. This means that in the face of marked price increases, some households will face greater difficulty sustaining their consumption. 

To the extent that lower-income households have a relatively smaller net income (income net expenditure and financial obligations), this leaves them relatively more vulnerable to cost-of-living pressures. 

Painful reform over the next two to three years

Rafizi also reiterated the government’s commitment to continue with its unpopular painful reform in the next two to three years, moving away from cash handouts and added that “sequencing” of the whole reforms is important. 

Taking centre stage amid all this, in our mind, was the government’s decision to increase the Sales and Service Tax (SST) by 2ppts to 8%, rather than our preferred but unpopular implementation of Goods and Services Tax (GST) to widen its tax base. 

Just a recap, GST was implemented back on April 1, 2015, at 6% and was subsequently reduced to 0% on June 1, 2018. The implementation of GST raised inflation by 0.9ppts during the month of implementation, while the reversion back to SST cut CPI by 1ppts in that month. 

The impact, both ways, was consistently and mostly felt within the furnishing of household equipment and routine, communication and miscellaneous goods and services. 

In terms of government finances, government revenue increased from RM17.2 billion in 2014 to RM41.2 billion in 2016. On a quarterly basis, revenue increased from RM5.2 billion in 1Q15 to RM8.9 billion in 3Q, effectively raising the government revenue by at least US$1 billion (RM4.67 billion) per month. This is compared to a RM0.7 billion increase in government revenue should the government raise the SST by 2ppts to 8%, ceteris paribus. Balancing this against the more manageable inflationary pressures from SST, it is therefore understandable for the authorities to decide on the lesser of the two evils. 

  • The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s editorial board. 

  • This article first appeared in The Malaysian Reserve weekly print edition