Rabobank: Malaysia can afford further subsidy cuts

by **Cals** Thu 14 Aug 2014, 01:20

Business & Markets 2014

Written by Charlotte Chong of theedgemalaysia.com

Wednesday, 13 August 2014 09:48

KUALA LUMPUR: Malaysia can afford to make further subsidy cuts to lower its fiscal deficit, said Rabobank head of financial markets research for Asia-Pacific, Michael Every.

He noted that about 16% to 18% of government expenditure is spent on subsidies, which is relatively higher than many other countries.

“It (the Malaysian government) can cut some fat if it wants to,” he told reporters after Rabobank’s 2014 Client Seminar yesterday.

Malaysia aims to trim its fiscal deficit to 3.9% of gross domestic product (GDP) in 2013 and 3.5% this year before returning to a surplus by 2020.

Every pointed out that the money for subsidies can be used for more useful spending such as for infrastructure, which would benefit the country in the long run.

“If the government is serious in reducing fiscal deficit, that (subsidy rationalisation) is the easiest way to do it,” he added.

While Every acknowledged the impact that subsidy cuts will have on the economy in the short term, he said it will help Malaysians to make more rational economic decisions in the long run “which can only be good for Malaysia”.

“I don’t think Malaysians are relying on subsidies. They are just used to them. When the government is tightening its belt, consumers will be spending less,” he said.

The government has implemented a slew of subsidy reforms since July 2010, cutting the subsidy for fuel and removing that for sugar.

Meanwhile, Rabobank head of food and agribusiness research and advisory for Southeast Asia and India, Pawan Kumar, opined that crude palm oil (CPO) prices should end the year at RM2,500 a tonne, down from an average of RM2,600 to RM2,700 in the first half of this year.

He added that the CPO price for next year should be better, driven by biodiesel demand.

Pawan sees an upside of RM100 to RM2,600 per tonne next year.

“We are not bullish on this [oil palm] sector and we remain fairly neutral,” said Pawan.

Bloomberg data showed that Malaysian CPO for October 2014 delivery dropped 2.91% to a one-year low to close at RM2,171 per tonne yesterday. “It shouldn’t be at this level three months down the road,” Kumar said.

Although El Nino seems less likely to form in the tropical Pacific Ocean now, Pawan said that it is still on the watch list. However, he said the production of CPO would not suffer too much from the global weather phenomenon.

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Every said money for subsidies can be used for infrastructure, which would benefit the country in the long run.

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“It’s probably going to be the story for next year and that should not impact the [CPO] price for next month even if it does happen in the latter part of the year.”

Pawan noted that the stock
level of palm oil in September would probably increase to about 1.9 million tonnes from 1.68 million tonnes in July.

According to the Malaysian Palm Oil Board (MPOB), palm oil stock in July 2014 rose 1.47% month-on-month to 1.68 million tonnes, while CPO production jumped 6.11% to 1.66 million tonnes.

This article first appeared in The Edge Financial Daily, on August 13, 2014.
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