Economist Geoffrey Williams.
PETALING JAYA: The proposed removal of fuel subsidies is unlikely to impact the ringgit in any way unless it is used to rebalance investments, says leading economist Professor Geoffrey Williams.
He told StarBiz any impact, whether long term or short term, will be minimal despite savings from the subsidy rationalisation being meant to improve the fiscal balance.
He said this in reference to the announcement made recently by Prime Minister Datuk Seri Anwar Ibrahim that the fuel subsidies will be gradually removed, starting with diesel and followed by RON95.
“The RM4bil in savings was meant to improve the fiscal balance but the increase in civil servants’ salary will add to spending and may negate the savings,” Williams said. He added the RM4bil could best be used to transfer cash to the lower-income groups.
“It would be worth RM100 per month to each B40 household. With the other savings on electricity and chicken this would be worth RM260 per month. However, the increase in civil servants’ pay will cost RM10bil to RM12bil, so the savings could well be eaten up by that,” he said.
The economist also does not see the savings impacting foreign direct investment (FDI) into the country. On whether this savings will impact the prices of common goods, Williams said it is unlikely.
He noted the first stage of the subsidy rationalisation had been announced and was already well underway before the announcement was made on Tuesday.
He explained the rationalisation of electricity subsidies and changes in chicken prices, for example, increased the government’s savings by RM4bil and RM1.2bil, respectively.
“A lot of progress has been made already and it’s part of a process. In many cases, prices have fallen or at least not risen for most people. The diesel subsidy rationalisation should not impact prices either,” he said.
When asked about the public’s sentiment about the removal of subsidies, Williams said the gap between the need for reforms and public perception is mainly due to poor communication.
“People have been persuaded that subsidies are good because they keep prices down. This is not true, they are expensive, they benefit the rich more than the poor, they distort the market and keep prices high and there is huge wastage, leakages and corruption. People are afraid that removal of subsidies will make them worse off because the benefits have not been made clear,” he said.
Rakuten Trade Sdn Bhd research vice-president Vincent Lau.
Meanwhile, Rakuten Trade head of equity sales Vincent Lau said the progress on the subsidy rationalisation has been good because the measures proposed may lead to smugglers stealing both the diesel and RON95 being forced to stop.
“There are those that are profiteering from the smuggling, for example, from our neighbouring countries. And this is quite a sizeable amount in monetary terms. This will plug that hole,” he said.
He added those who are short-sighted will still not advocate for the removal of subsidies but in the long term, it will benefit all.
“This is good for the economy because fiscal prudence is there. The net effect will be a plus.
“This will draw more foreign investors, which, in turn, will impact the stock market in a positive manner,” he said.
On it giving a boost to the ringgit, Lau said it will be positive because the government is finally biting the bullet and making progress with the fuel reforms.
“Better fiscals are lined with the stock market and ringgit. If the Federal Reserve (Fed) cuts its rates, which is likely to happen, that’s a plus as well. I expect foreign fund flows to continue being positive,” he said.
The ringgit could have limited gains to make against the US dollar this year, according to a currency analyst with an international bank.
He said the real interest rate spread between Malaysian and US is leading many to hold the greenback, leading to the lower value of the ringgit against the greenback.
He expects to ringgit to remain under pressure against the greenback for much of 2024 instead of the strengthening picture many local analysts and Bank Negara are suggesting, unless the interest rate spread between the economies narrows, which looks unlikely as inflation remains a concern in the US and for Fed officials.
“With the US dollar offering a 5% to 5.5% risk-free rate, we don’t expect to see much money switching to currencies like the ringgit even if the Fed were to cut its federal funds rate later in the year.
“Furthermore, the Chinese yuan maybe be edging lower against the US dollar in a move to boost exports which will impact the ringgit.
“In response, regional currencies and central banks will have to be on their toes and react, if not they might lose out on exports,” he said.
The analyst added with ample liquidity in the local banking system, FDI promoters are also looking to fund their projects in Malaysia with money sourced from the local market as the lending rate is much lower as compared to their home markets.
“What’s good for Malaysia is that many local corporates have cash which can be repatriated and tapped to fund investments for the growth of the economy and to some point support the ringgit,” he said, and forecast the ringgit to close out 2024 at around 4.80 against the greenback.
