Analysts surprised by tobacco duty increase before tabling of budget, 06/10/09

ANALYSTS said they were caught by surprise over the government’s move to raise excise duties on tobacco, three weeks ahead of the tabling of Budget 2010.

They said the directive to increase tobacco excise duties by 1 sen per stick to 19 sen came earlier than anticipated. They had thought that any increase would be announced during the tabling.

The last time the government raised tobacco excise duties before Budget Day was in July 2007. Over the past few years, it has typically increased duty by 3 sen per stick.

Analysts said tobacco manufacturers had raised their prices by as much as 30 sen per pack from yesterday in response to the higher duties.

The increase in both excise duties and prices has fuelled concern of a rise in illicit trade.

“Although, to a certain degree, an increase in excise duties encourages consumers to switch to extremely low-priced cigarette brands, we believe a switch to illicit cigarettes will be most likely since these are priced much lower,” OSK Research Sdn Bhd said in a report.

It said illicit trade would remain a concern for the tobacco industry although it would be less of a risk next year as the 5.6 per cent excise duty increase is deemed acceptable and not likely to trigger a steep rise in illicit trade like this year, which has seen excise duties go up a hefty 20 per cent.

HwangDBS Vickers Research said the illicit cigarette market share had jumped to more than 35 per cent compared with 25 per cent last year, and posed a major concern to all the legitimate players.

This indication from the industry puts Malaysia among the world’s highest in terms of volume of contraband cigarettes.

A slowdown in sales volume is also expected as pricing remains the most crucial factor, although it may be on a smaller scale.

“We initially expected an 8 per cent decline in sales volume this year although half-year volumes were already 11 per cent lower.

“With this surprise lower-than-expected rise in selling prices, we maintain our 2009 volume forecasts,” Maybank Investment Bank said.

While most analysts said the Budget 2010 announcement would be a non-event for the industry, Ecmlibra Investment Research indicated otherwise.

It suggested that the government was likely to impose another duty increase as it needed tax revenues to shore up a widening deficit arising from the fiscal stimulus measures.

“The government may again impose another duty increase ranging between 1 sen and 3 sen per stick as the budget deficit suggests a figure at the upper range of our expectations,” it said.

Most research houses have made either “hold” or “neutral” calls on the tobacco sector.