THE expected rise in petrol prices after the government’s blanket subsidies are removed is unlikely to dent private consumption, a key driver of economic growth this year, said a think-tank.

In the past, domestic private consumption continued to grow even as inflation went up, such as when the goods and services tax (GST) was implemented, said the Socio-Economic Research Centre (SERC).

Worries that the price of RON95 petrol will shoot up and lead to a rise in cost of living was among the reasons cited by the government in postponing the rollout of its targeted fuel subsidy programme (PSP).

The PSP, which would allow only low- and low-middle income Malaysians to receive fuel subsidies, was set to start this month.

Currently, fuel subsidies are enjoyed by everyone, including well-off Malaysians, by capping the price of RON95 at RM2.08 sen per litre.

SERC estimates that if the PSP is not implemented, the government will have to spend RM4.8 billion this year to cap the RON95 price.

In comparison, the PSP will cost the government RM65.4 million a month, or RM784.8 million for all of 2020, and go to only eight million motorists in the low-income B40 and middle-income M40 groups.

Once the PSP starts, RON95 prices will be floated according to market rates, as with the more expensive RON97.  

The SERC projected that headline inflation will go up to 2% this year, due in part to the PSP.

“Headline inflation is estimated to increase higher to 2.0% in 2020 from an estimated 0.7% in 2019,” SERC executive director Lee Heng Guie told The Malaysian Insight.  

Beside the PSP, which may instead start in the second half of 2020, inflation will rise because of higher minimum wage levels, a digital tax, potential hikes in water tariffs and higher medical consultation fees, Lee said.

But the higher inflation rate is still manageable, Lee said, adding that while consumers are expected to spend more carefully, consumption is still expected to grow.

Between 2011 and 2018, consumption grew an average 7.0% per year.

“Underpinning consumer spending are employment and income growth. We estimate the jobless rate to rise by between 3.3% and 3.4%, and the wage increment to between 4.5% and 5.0%.

“Continued payment of the Cost of Living Aid (BSH) as well as higher palm oil prices will also help rural household spending.”  

Driver of growth

In SERC’s 2020 economic outlook report, Lee said private consumption was “the only leg” holding up the economy due to weak private investment.

“Domestic demand, especially private consumption, will be calling the shots, albeit at a slower pace. Budget 2020’s 4.3% increase in development expenditure to RM56 billion should help provide partial support to the domestic economy.

“What matters most is to execute effectively the budget’s programmes and initiatives, and to disburse funds in a timely manner for the implementation of projects.”  

Due to the challenging global economic scenario and weak domestic private investment in the local economy, growth in 2020 is expected to slow to 4.5% from 4.6% last year.

Lee said consumers will have to adjust their spending once the PSP is implemented and RON95 prices are floated but moves are in place to buffer the effects.  

“The government has pledged to hike fuel prices by small steps of between one and two sen when the fuel prices are floated while giving targeted subsidies to the B40 and M40,” said Lee.  

“The BSH also comes in handy to help mitigate, partially, the removal of the blanket fuel subsidy.”

Lee also cited the 2008 oil price surge, when fuel prices went up 78 sen per litre, saying private consumption still grew strongly by 8.7% when backed by a cash handout to control a 5.4% increase in inflation.

“When the GST was introduced in 2015, consumer spending growth cooled to 6.0% in 2015 and 6.1% in 2016.

“Ultimately, the PSP is necessary to ensure that public funds are used as effectively as possible to ensure that only the needy and vulnerable receive help,” said Lee. – January 21, 2020.