PETALING JAYA - The Government could potentially save up to RM10 billion (S$3.9 billion) next year if the current downtrend in global oil prices continues and the recent reduction in the fuel subsidy at local petrol pumps is maintained.
Economists said that the decline in the fuel subsidy, coupled with the falling global oil prices, would help the Government achieve its target of trimming down its Federal Government budget deficit to 3 per cent of gross domestic product (GDP) next year.
Based on estimates, the latest reduction of 20 sen per litre in the price of RON95 and diesel could bring about savings of some RM3.3bil per year.
As for the impact from the decline in global oil prices, last year's figures from the Treasury showed that the allocation for the fuel subsidy was RM28.9bil for 2013, based on an average oil price of US$122 (S$155) per barrel.
If the current price of US$94 per barrel for Brent crude oil is used as a yardstick, then the subsidy bill should be reduced to about RM22bil, indicating potential savings of RM7bil.
According to an economist, if the global crude oil price hits US$80 per barrel, there would no longer be any subsidies for fuel.
Since late last year, the Government has said that it wanted to reduce the Federal Government deficit and has embarked on a fuel subsidy rationalisation programme involving petrol, diesel and natural gas supplied to the electricity-generation sector.
On Wednesday, the Government announced that it had reduced the current fuel subsidy by 20 sen in keeping with its subsidy rationalisation plan. The new price took effect yesterday.
AllianceDBS Research economist Manokaran Mottain said in a note to clients that the move showed that the Government had an urgent need to control budget spending.
"Committed to bringing down the budget deficit to the GDP of an estimated 3.5 per cent this year to 3 per cent in 2015, as well as achieving a balanced budget by 2020, the Government has an urgent need to control its budget spending," he said.
Manokaran said the proportion of the fuel subsidy to the Government's budget operating expenditure had been gradually increasing from 5.6 per cent in 2000 to 13.4 per cent in 2013.
"Therefore, we expect the Government's fiscal consolidation to focus on fuel subsidy cuts, given the high composition it takes up in operating expenditure and the growing pressure to make the economy more competitive," he added.
Following the 20-sen-per-litre subsidy cut, the price of RON95 is now at RM2.30 per litre, while diesel is at RM2.20 per litre.
Under the Federal Government's budget of RM262.15bil for this year, a total of 15 per cent or about RM39bil is being allocated for subsidies.
AmResearch economist Patricia Oh said due to the petrol pump price increase, the full-year inflation is likely to register a growth of 3.2 per cent this year.
She also warned that consumer prices are expected to escalate further next year, especially from April 2015 onwards when the goods and services tax takes effect.
Manokaran, who had expected inflation to taper towards the end of the year on base effect, now expects inflation to spike again in the last quarter of the year.
He is looking at an inflation of around 2.5 per cent to 3 per cent for September and maintains his view that full-year inflation will be 3.5 per cent this year and hitting 4 per cent next year.
For the first eight months of the year, the average inflation rate was 3.3 per cent.