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Jumat, 22 Juli 2011

Economy Larger subsidized fuel quota, but limited impact seen on inflation and fiscal position - DBS

The House of Representatives Budget Committee has approved the increase in subsidized fuel quota from 38.6m kiloliters to 40.5m kilolitres. However, the approved amount is still short of the 42m kilolitres that downstream oil and gas regulator BPH Migas was seeking. This implies that the government will have to take steps to restrict subsidized fuel usage going forward. In our view, it is likely that a plan similar to one proposed last year (where private vehicles will be banned from using subsidized fuels and only public vehicles and motorcycles will be allowed to use subsidized fuels) may be re-introduced. However, it is still far from clear that the government will be able to stick to its revised subsidized fuel target. The issue of energy prices has always been politically difficult and notably, an initiative to restrict subsidized fuel usage in April this year was postponed. We would not be surprised if the fuel restrictions will be delayed from the targeted start period this September to next year.

When implemented, the impact on CPI would be more muted compared to when the subsidized price hike took effect in 2008. Indeed, subsidized fuel prices may be kept on hold through the rest of the year even as the government enforces the new quota and there may not be any visible impact on headline CPI. In this case, headline inflation may fall close to 5.0% by the end of the year. Even if a decision is taken to raise subsidized fuel prices, we suspect that only a small increase would be tolerated (around 10%). Under this scenario, headline inflation may breach 6% (YoY) for several months before dipping in December to around 5.7%. Under both scenarios, there are downside risks to our 6.7% inflation forecast for 2011.

Any impact on the budget is going to be limited. After factoring in the larger fuel quota and higher oil prices, the government’s budget deficit as a percentage of GDP is likely going to be 2.0% or lower, not enough to threaten the fiscal outlook. Moreover, the government also has sufficient cash reserves from funds that were not disbursed from previous years that may be tapped on.

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