PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

16 July 2010

Fuel And Sugar Prices Were Raised To Reduce

Subsidy

◆ The Government announced that, effective 16 July, prices for fuel, specifically petrol, diesel and liquefied petroleum
gas (LPG), as well as sugar, will be raised in a move to gradually reduce the Government’s subsidy as set out under
the subsidy rationalisation programme. As a result, prices for petrol RON 95 and diesel would be increased by 5
sen or 2.8-2.9% to RM1.85/liter and RM1.75/liter respectively (see Tables 1 & 2), while LPG price would be raised
by 10 sen to RM1.85 per kilogramme. As for petrol RON 97, it will no longer be subsidised and the price would be
determined by the automatic pricing mechanism. The new price is RM2.10/litre after a 5 sen hike. In the case of
sugar, the price would be adjusted upward by 16.7% or 25 sen to RM1.90 per kilogramme. The subsidy rationalisation
is expected to save the Government by more than RM750m in 2010. Nevertheless, the Government is still expected
to spend an estimated of RM7.82bn on fuel and sugar subsidies in 2010.

◆ Retail petrol, diesel, LPG and sugar account for 7.5%, 0.2%, 0.5% and 0.5% respectively of the weight in the
Consumer Price index (CPI). In particular, the 2.8% increase in RON 95 retail petrol price will add 0.2 percentage
point to the CPI, while the 16.7% increase in sugar price will add 0.08 percentage point to it. As for diesel and LNG,
the impact will be minimum due to their low weights in the CPI, while only about 10-12% of consumers use petrol
RON97, indicating that its impact will not be broad-based as well. Given that the increase was gradual, we believe
the direct impact on the CPI is not likely to be very significant and we believe it will likely be one-off. In
2008, when fuel prices were raised in June, the significant immediate impact on the CPI was seen in the first two
months of the increase in June and July, before easing off in August. This, together with some spill-over effect, will
likely push up the CPI to 1.9% yoy in July and it will likely accelerate to a high of +2.6% in December, from +1.6%
in June. For the full-year, however, we are keeping our average inflation rate forecast unchanged at 2.0% in 2010,
as we had already factored in a gradual removal of subsidies. For 2011, we have raised our inflation forecast to
2.8%, from +2.5% projected previously.

◆ Although the change in administrative pricing will lead to higher inflationary pressure, we believe Bank Negara
Malaysia (BNM) will unlikely act on it. As it stands, its interest rate hike currently was geared towards normalising
its monetary condition rather than controlling inflation. Indeed, we believe the Central Bank is likely to have done
with its interest rate hike this year. Nevertheless, we believe the Central Bank will likely continue with its policy
normalisation and the overnight policy rate (OPR) will likely be raised by 50-75 basis points in early part of 2011
to bring it to a more normal level of 3.25-3.5%.

◆ Meanwhile, we believe the gradual and marginal increase in fuel and sugar prices are unlikely to affect
consumer spending and private investment significant, as the move will likely take away around RM750m or
about 0.1% of GDP from the consumers’ coffer. In any case, consumer spending and private investment are
expected to grow at a more moderate pace in 2H 2010, mainly on account of a slowdown in the global economy
and hence the country’s exports.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 16 July 2010

Table 1 : Change In Fuel Prices

Date Petrol Diesel

Change New Price % Chg Change New Price % Chg
In Price In Price
(sen/litre) (RM/litre) (sen/litre) (RM/litre)

October 2000 10 1.20 9.1 5 0.60 -

October 2001 10 1.30 8.3 10 0.70 16.7
May 2002 2 1.32 1.5 2 0.72 2.9
November 2002 1 1.33 0.8 2 0.74 2.8
1 March 2003 2 1.35 1.5 2 0.76 2.7
1 May 2004 2 1.37 1.5 2 0.78 2.6
1 November 2004 5 1.42 3.6 5 0.83 6.4
1 March 2005 - 1.42 3.6 5 0.88 6.0
5 May 2005 10 1.52 7.0 20 1.08 22.7
31 July 2005 10 1.62 6.6 20 1.28 18.5
1 March 2006 30 1.92 18.5 30 1.58 23.4
5 June 2008 78 2.70 40.6 100 2.58 63.3
23 August 2008 -15 2.55 -5.6 -8 2.50 -3.1
25 September 2008 -10 2.45 -3.9 -10 2.40 -4.0
15 October 2008 -15 2.30 -6.1 -20 2.20 -8.3
1 November 2008 -15 2.15 -6.5 -15 2.05 -6.8
18 November 2008 -15 2.00 -7.0 -15 1.90 -7.3
3 December 2008 -10 1.90 -5.0 -10 1.80 -5.3
16 December 2008 -10 1.80 -5.3 -10 1.70 -5.6
15 July 2010 5 1.85 2.8 5 1.75 2.9

Table 2 : Regional price Comparison

Country Petrol RON95 Diesel Sugar Petrol RON97

RM/litre RM/litre RM/kg RM/litre

Malaysia 1.85 1.75 1.90 2.05

Thailand 4.12 2.83 2.60

Indonesia 2.48 2.51 3.68

Philippines 6.60 5.00 3.46

Source: New Straits Times

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IMPORTANT DISCLOSURES

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