According to him, general prices tend to accelerate due to the increase in fuel prices

by MARK RAO / pic by MUHD AMIN NAHARUL

The rising fuel prices and inflationary pressure may force authorities to revisit the idea of subsidies to fend excessive cost pressures as the rising cost of living hits the majority of Malaysians.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said talks of a fuel subsidy revival are hard to resist as the hike in retail pump prices will increase inflationary pressures in the country.

“The impact will be consumers’ obviously lower purchasing power as general prices tend to accelerate due to the increase in fuel prices,” Mohd Afzanizam told The Malaysian Reserve (TMR) in an emailed reply.

“However, any deviation in fiscal consolidation plans would have an implication on Malaysia’s prevailing sovereign rating.”

The federal government, he said, will be wary to intervene in the current weekly pricing scheme to avoid compromising Malaysia’s sovereign rating of ‘A-’ and ‘Stable’, according to an analyst.

He said this scenario is creating a “delicate situation” for the government, as reintroducing fuel subsidies would mark a departure from its consolidation exercise.

The government removed fuel subsidies on Dec 1, 2014, placing retail pump prices under a managed monthly float system based on market prices.

It then introduced a weekly fuel pricing mechanism on March 29 last year as a replacement.

Fuel subsidies were removed to take advantage of the low oil price environment at the time. However, oil prices are now trending above US$68 (RM272)

per barrel at a time of increasing cost pressures in Malaysia. In November last year, Malaysia’s Consumer Price Index (CPI) rose 3.4% year-on-year to 120.8, with transport costs alone noting a 10.8% jump to 12.1% of total CPI. Housing, water, electricity, gas and other fuels CPI was up by 2.2% and contributed to 2.4% of total CPI over the same period.

Retail pump prices for RON95, RON97 and diesel are also higher from last week at RM2.29 (up three sen), RM2.56 (up three sen) and RM2.32 (up six sen) respectively.

Mohd Afzanizam said RON95 accounted for approximately 8% of the total CPI constituent.

“We know that when retail fuel prices increase, other prices of goods and services tend to follow suit,” he said.

“When it does, it will be almost impossible for other prices to come down even if fuel prices decline at some point in the future.”

He said the “stickiness” of prices is one of the main problems, with profiteering and malpractices among businesses contributing to the issue.

“Therefore, strengthening enforcement through the existing legislation could be the way to go.”

A key question going forward, Mohd Afzanizam said, is whether the rise in crude oil prices is sustainable as retail fuel prices are now subject to market forces.

Brent crude oil broke the US$68 per barrel mark last Thursday and continued to trend at that level the following day, the highest it achieved since June, 2015.

While geopolitical tensions in the world’s third-largest oil producer Iran propped up prices, growing demand for crude oil due to the winter season has helped bring inventory levels down.

“Demand for heating oil — a by-product of crude oil — from countries in the northern hemisphere has resulted in higher refining activity which has brought down inventory levels,” MIDF Amanah Investment Bank Bhd equities research analyst Aaron Tan told TMR when contacted.

Tan said prices will likely remain stable this year as the demand gradually catches up to supply.

“During the (2014) oil crisis, we were looking at an inventory surplus of 2.5 million barrels a day. Now, this has been reduced to about one million barrels a day which is normal by industry standards,” he said.