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Malaysia Scraps Fuel Subsidies As Najib Ends Decades-Old Policy
Perspective | 27 November 2014

Malaysia will abolish subsidies for gasoline and diesel starting from December as falling oil prices provide Prime Minister Najib Razak the opportunity to end a decades-old policy of cheap fuel.

The cost of the widely used RON 95 grade of gasoline and diesel will be based on a managed float system starting from 1 December, the government said in a statement on 20 November. Moody’s Investors Service said the decision to shift to a more flexible pricing system is a “positive step” for Malaysia.

A decline in global fuel prices is giving countries including Malaysia, India and Indonesia the chance to scale back subsidies that have contributed to fiscal deficits. Reduced borrowing requirements may help emerging markets weather capital-flow disruptions as the US moves towards raising interest rates in 2015.

“This is a great move,” said Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore. “This is a very small window of opportunity given the collapse in international fuel prices, which has basically fallen to the subsidised domestic fuel prices. So if you do it now, it doesn’t show up in the sticker price at the pump.”

The Malaysian ringgit rose against the US dollar after 20 November’s announcement, the biggest gainer among Asian currencies. It has declined about 5.5 percent in the past three months as strategists cut their forecasts for the currency on concerns that the nation is vulnerable to a selloff.

Price Gains
Najib has pledged to improve Malaysia’s fiscal position through cuts in subsidies and government expenditure, and by broadening the tax base. Inflation in Southeast Asia’s third-biggest economy is accelerating, and the central bank forecasts price gains will quicken with the implementation of a goods and services tax on 1 April 2015.

“Through the managed float, the average change in the cost of the product will determine pricing for December,” the Ministry of Domestic Trade, Co-operatives and Consumerism said. “This means that if the market price of crude oil increases, the retail price of RON 95 and diesel will also increase. And vice versa.”

Indonesia raised fuel prices in November to reduce energy subsidies. In India, lower energy costs have emboldened Prime Minister Narendra Modi’s administration to step up efforts to cut fuel subsidies as the government in October freed diesel prices from state control for the first time in more than a decade and raised natural gas tariffs.

Deficit Target
Malaysia narrowed its fiscal deficit to 3.9 percent of gross domestic product in 2013, and Najib wants to further trim the gap to 3.5 percent this year and 3 percent in 2015, heading towards a balanced budget by 2020.

Moody’s has a positive outlook on Malaysia’s A3 ranking and analyst Steffen Dyck said on 20 November that “significant consolidation” of the government’s fiscal deficits and debt burden could trigger a credit rating upgrade.

The government raised the prices of gasoline and diesel in October and said it will spend more than RM21 billion (US$6.3 billion) in 2014 on fuel subsidies even after the increases.

“Subsidies have eaten up too much of government coffers for too long,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corporation in Singapore. As much as 20 percent of the government’s budget had “been wasted on subsidies, rather than channelled more usefully,” he said.

Consumer prices are forecast by the government to climb 4 percent to 5 percent in 2015, the fastest since 2008. A goods and services tax of 6 percent will start in April 2015, an added burden on businesses and households.

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