Impact of rising oil price
- As a net oil exporter, Malaysia’s CA stands to be an immediate beneficiary of rising oil prices but blanket fuel subsidies will take a toll on the fiscal position.
- Improving non-O&G commodity prices help insulate Indonesia’s CA balances against higher O&G import bills.
- Varying degrees of government intervention soften the pass-through of higher energy prices to inflation in Malaysia, Indonesia and Thailand.
Malaysia in a more advantageous position as a net O&G exporter
Brent/WTI crude oil prices have surpassed US$80 per barrel, rising by >60% YTD due to supply constraints and surging demand amid economic re-opening. A sizeable O&G trade surplus (+RM26.6bn in 8M21) places Malaysia in a more advantageous position relative to other Asean peers in a rising oil price environment. The largest chunk of the energy trade surplus was contributed by LNG (+RM21.5bn in 8M21), followed by crude petroleum (+RM3.7bn in 8M21) and a rare surplus in petroleum products (+RM1.6bn in 8M21). Assuming LNG moves in lockstep with oil prices, every US$10/bbl increase in oil price improves Malaysia’s CA position by up to 0.4% of GDP. As net O&G importers, Indonesia, Singapore and Thailand will incur higher O&G import bills. Nonetheless, we see less risk of a sharp CA deterioration for Indonesia this time around given the surge in non-O&G trade surplus driven by higher palm oil, coal and base metal prices, unlike in 2012-2014 and 2018-2019 when a widening O&G trade deficit was compounded by low non-O&G trade surplus (see Fig 10-11). Thailand’s CA, which has fallen into deficit for the first time since 2013 (-US$10.2bn in 8M21 vs. +US$20.3bn in 2020), may deteriorate further given the lack of tourist receipts.
Oil price pass-through softened by government interventions
Globally, an extended oil price shock represents a windfall for producers and a tax on consumers. Nonetheless, the distributional effects are dependent on fiscal contribution from the energy sector and energy subsidies at the expense of government finances. Governments in Malaysia, Indonesia and Thailand exert some control over fixing retail prices for fuel, cooking gas and/or electricity tariffs, thereby limiting the pass-through of higher energy prices to consumers. Malaysia imposes a ceiling on retail fuel price – RM2.05/litre for RON95 petrol and RM2.15/litre for diesel – and subsidises the difference (Fig 5-6) while Thailand recently announced a cap on diesel pump price at THB30/litre and finances subsidies with its THB10bn Oil Fuel Fund. In Indonesia, the government determines subsidised fuel prices – which have been left unchanged at Rp6,450/litre for Premium gasoline and Rp5,150/litre for Solar diesel since Apr 2016 – and shares the subsidy burden with national oil company Pertamina (Fig 13-14). Fuel prices and
electricity tariffs in Singapore are determined by free market mechanisms but the overall contribution to headline inflation is restrained by the relatively lower weight of energy components in the CPI basket at ~4% compared with the other three countries, i.e. ~12% for Thailand and Malaysia, and ~10% for Indonesia.
Fiscal impact on Malaysia and Indonesia
For Malaysia, we estimate additional government revenue of RM430m for every US$1/bbl increase in crude oil price after adjusting for weaker RM/US$ (see Fig 8), higher than the official guidance of RM300m. The government starts incurring fuel subsidies when oil price hits US$60/bbl (see Fig 7), with additional fuel subsidies estimated at RM650m per US$1/bbl crude oil price hike. Hence, the blanket subsidy for RON95 petrol and diesel exposes Malaysia’s fiscal balance to a deterioration of RM2.2bn or 0.1% of GDP per US$10/bbl increase in oil price above US$60/bbl. For Indonesia, electricity and LPG
subsidies account for 80-90% of the energy subsidies on the state budget while fuel subsidies are mostly borne by Pertamina. For every US$10/bbl increase in oil price, we estimate the energy subsidy on the state budget rises by Rp24tr or 0.1% of GDP (see Fig 18).