KUALA LUMPUR: The latest round of subsidy rationalisation may not increase the inflation rate this year but continued rationalisation could push rates higher in 2011.
The subsidy cuts add pressure to the consumer price index (CPI), according to CIMB Research in a report released on Monday.
Although the direct impact on the CPI appears manageable, one should also be mindful of the indirect spillover effects, it added.
Last Friday, the government increased the price of RON95 by five sen to RM1.90/litre, while diesel price was also raised by five sen to RM1.80/litre. Sugar price rose by 20 sen to RM2.10/kg, and LPG price went up five sen to RM1.90/kg.
“We estimate the combined price hikes will result in a 0.2% point rise in the headline inflation (fuel price adds 0.18% pt, sugar +0.03% pt and LPG +0.01% pt).
“During the previous price hike in July, the CPI increased by 1.9%-2.1% in July-August. We maintain our 2010 inflation estimate of 1.7%. Continued rationalisation of subsidies could add to the inflation upside for 2011. As such, we also raise our CPI forecast higher to 3% from 2.5% previously,” said the report.
When contacted, CIMB head economist Lee Heng Guie reiterated that the impact would be more next year.
“We will have a new base to work on. The government is expected to review every six months while rationalisation is expected to continue,” he said, adding the inflation rate was expected to hover between 2.5% and 3% next year.
On whether the latest hike would have any impact on retail, especially those from the food and beverage and transportation sectors, Lee said retailers would have to think how much they can absorb and pass through.
“We have yet to hear from any associations this time around. During the last price hike, those involved also did not raise their prices,” he said
GD Express Carrier Bhd (GDEX) executive deputy chairman Teong Teck Lean said most companies involved in the logistics, transportation and delivery services currently enjoyed fleet discounts under the subsidised fuel system.
He said the impact of any reduction in or removal of subsidies would depend on the nature of each company’s business, as those operating container lorries or general transportation of goods had different cost structures than those in the express delivery or courier business.
He said for GDEX, the bigger cost was in terms of manpower and its tracking systems, adding that any increase in fuel prices will not be too severe on its operations.
Teong explained that as the company’s services involved deliveries to multiple destinations and not a single journey, the cost factor could be distributed among all its customers, and hence all the parties would incur a marginal increase.
“If you compare us with a transporter delivering to just one customer or one destination, any increase in fuel price would make its operations more expensive.
“But for our industry, we have the economies of scale, the more we deliver, the lower the cost. For example, assuming there is a 15% hike in fuel price, our surcharge could be around 3% to 5%, which would not impact our customers too severely,” he said.
CIMB Research’s economic update said the price adjustments were inevitable due to the rise in commodity prices where crude oil price has risen by 17.9% or US$13.60/bbl (RM42.70) since July to US$89.20/bbl currently, while the price of raw sugar has soared by US$13.90/lbs to US$29.50/lbs since June.
However, the report said interest rates are not expected to rise in the near future but it expects Bank Negara Malaysia (BNM) to resume normalising rates once the economy gains momentum in 2H11.
In its report, RHB Research Institute also came to the conclusion that the latest hike’s impact would be manageable but inflation would likely trend up next year due to the government’s gradual move to reduce subsidies every six months. This in turn would lead to higher retail fuel and food prices.
RHB Research also said that rising global commodity prices due to monetary easing in developed countries would likely result in higher food prices and inflation.
“However, this will likely be mitigated by a slowdown in demand. In this respect, we expect inflation to rise to an average rate of 2.2% in 2011, from +1.7% estimated for 2010.
“In tandem with rising inflation and a sustained economic growth, albeit at a more moderate pace in 2011, we believe BNM will likely resume its policy normalisation in 2011, after taking a pause in the last two meetings. However, the timing will depend on how soon the global economy stabilises.
“Hence, we expect the overnight policy rate to be raised by 50-75 basis points in 2H11 to bring it to a more neutral level of 3.25%-3.5%,” the report said, adding that the central bank ought to introduce measures to curb rising household debts which rose to 77.9% of GDP at end of July this year.
(The Edge Financial Daily, December 8, 2010)
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