Fuel subsidy removal is positive for economy, says research firms

The fuel subsidy removal by the government is a positive move and will not have a significant impact on the economy, research firms said.

RHB Research Institute said it believed the decision was right, as it can ease the government's subsidy burden, given that falling crude oil prices will impact oil revenue negatively.

It will also put pressure on the government budget deficit.

"We do not expect the move to impact the economy negatively, as we believe consumers as well as businesses, can adjust to it and will likely get used to it over time.

"The savings from the fuel subsidy can then be used for more productive purposes such as development and improve the country's competitiveness," it said in a note today.

The government, last Friday, announced that the retail prices of RON95 petrol and diesel would be fixed on a managed float system from Dec 1.

It may also consider introducing a multi-tiered targeted fuel subsidy mechanism later, if oil prices were to spike again, and the move is to help deal with the rising cost of living for the mid-to-lower-income groups.

RHB Research said the managed float system would likely prevent businesses from simply raising prices each time the fuel subsidy is cut.

Increasing fuel prices by the government has worsened inflation in the country in recent years.

"We believe the strength of economic growth will likely be a more important consideration, relative to inflation for monetary decision in 2015, given the challenging global economic environment," it added.

Meanwhile, Kenanga Investment Bank Bhd expects little to no impact on inflation, as the fuel price hike in October had already brought it close to the unsubsidised rate.

It said this should also have minimal impact on the monetary policy which the research firm feels would be more concerned about weaker global growth next year.

"Nonetheless, the move will definitely help the government towards fiscal consolidation and making the fiscal deficit target of 3.5 per cent of gross domestic product in 2014 and 3.0 per cent in 2015, more than likely, achievable," it said.

Kenanga retained its inflation forecast of 3.3 per cent for this year.