Power tariff – the last straw that broke the camel’s back?

Liew Chin Tong
Malaysiakini


MP SPEAKS

The spate of new taxes and price hikes, the latest being the electricity tariff hike, have caused me to doubt whether the government under Najib Abdul Razak has any idea about the macroeconomic risks that Malaysia faces.

Against the backdrop of an uncertain global economy and the likeliness of the quantitative easing 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 percent for Peninsular Malaysia, and by about 17 percent 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 percent 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 sen per kWh or 16.9 percent from current average rate of 29.52 sen per kWh to 34.52 sen per kWh.

GST will cause inflation

Currently, Malaysia is already burdened with risks of a potential crisis due to the following factors:

First, the goods and services tax (GST), which will be introduced in April 2015, will eat away disposable income and hence depress domestic demand, as well as cause inflation, at least in the first year.

Second, quantitative easing is likely to end by then. The interest rate is likely to be higher in 2015 and a higher interest rate will depress domestic demand further. As the US dollar appreciates, imports will become more expensive.

On the other hand, exports may not be too good, even with a depreciated ringgit largely because job growth in the 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 United 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 causing 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.

Will there be a property bubble?

Fourth, will 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 quantitative easing tapering) and lower commodity prices?

The moment somebody 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 will likely result in more expensive borrowing costs to the government, and consequently push up further the interest rate for everyone else.

Fuel prices are never easy to gauge, but the 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,

However, this also means eroding 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 efforts should be made now to prevent such an occurrence.

LIEW CHIN TONG is the MP for Kluang and DAP national political education director.