Electricity tariff – the last straw on the camel’s back?
The spate of new taxes and price hikes, the latest being the electricity tariff hike, causing me to doubt whether the Najib Government has any idea about the macroeconomic risks Malaysia faces.
Against the backdrop an uncertain global economy and the likeliness of QE tapering, domestic demand is crucial in sustaining the Malaysian economy. Yet the spate of new taxes and price hikes will produce an opposite result: the further decline of domestic demand.
Will the electricity tariff increase become the last straw on the camel’s back that will see the Malaysian economy collapsing due to the confluence of several domestic and global factors?
The electricity tariff will be increased by an average of about 14.89% for Peninsular Malaysia, and by about 17% for Sabah and Labuan from next year.
The average electricity tariff in Peninsular Malaysia will be up 4.99 sen per kWh or 14.89% from the current average rate of 33.54 sen/kWh to 38.53 sen/kWh.
For Sabah and Labuan, the average tariff will be up 5.0 sen per kWh or 16.9% from current average rate of 29.52 sen per kWh to 34.52 sen per kWh.”
Currently, Malaysia is already burdened with risks of a potential crisis due to the following factors:
First, Goods and Services Tax, which will be introduced in April 2015, eats away disposable income and hence depresses domestic demand, as well as causes inflation at least in the first year.
Second, quantitative easing (QE) is likely to end by then. The interest rate is likely to be higher in 2015. A higher interest rate depresses domestic demand further. As the US dollar appreciates, imports would be more expensive.
On the other hand, exports may not be too good even with a depreciated ringgit largely because job growth in US and Europe would still be slow, thus demand of our exported goods would not be high. In addition, some US manufacturers are moving back to the States, which means room for Malaysia’s export-led growth is limited.
Third, I am of the view that palm oil price is likely to further soften in 2015 mainly due to oversupply and a potential soya super harvest next year, despite the Haiyan catastrophe causes short-term shortages of coconut oil. The potential softening of palm oil prices will have major political consequences in Malaysia as small owners in small towns and rural areas depend heavily on commodities.
Fourth, would there be a property bubble? What would be the combined effect of electricity tariff hike, GST implementation, higher interest rate (mostly as a result of QE tapering) and lower commodity prices? The moment someone begins to default, there is risk of a meltdown, especially in the context of very high domestic debt to GDP ratio.
Beyond that, the rating agencies’ greater scrutiny of Malaysia’s poorly managed public finances would likely to result in more expensive borrowing costs to the government and consequently pushing interest rate for everyone else up further.
Fuel prices are never easy to gauge. But petrol price may fall as the supply of shale gas comes through. The fall of petrol price will be a double-edged sword.
It would mean less subsidy payment thus helping to reduce the deficit yet it will also erode Petronas’s contribution to the public coffers thus potentially resulting in widening of deficit, which in turn further erodes the Government’s creditworthiness.
The Government needs to have the big picture in mind and coordinate its macroeconomic policies to avoid the potential meltdown. Any hard landing is going to harm millions of ordinary families hence effort should be made now to prevent such occurrence.