Malaysia raised fuel prices for the first time since 2010, joining neighboring Indonesia in curbing subsidies that have stretched government budgets and threatened investor confidence.
The price of the widely used RON 95 grade of gasoline will rise 20 sen to 2.10 ringgit ($0.64) a liter at midnight, according to an announcement by Prime Minister Najib Razak today in Putrajaya, outside of Kuala Lumpur. Diesel will increase 20 sen to 2 ringgit a liter. The increases will help the government save about 1.1 billion ringgit this year and 3.3 billion ringgit annually in future by reducing state subsidies, he said.
“The external environment is increasingly challenging,” Najib said. “The moderation in the current account of the balance of payments, coupled with continued fiscal deficits, pose medium-term risks to the economy.” Strengthening the fiscal deficit position is vital to sustaining the economy’s resilience and enhancing public and investor confidence, he said.
The ringgit climbed to a two-week high today before the measures were announced. Malaysian officials signaled last week they were preparing measures to strengthen the budget position as the currency touched a three-year low. The Southeast Asian nation joins emerging markets from Indonesia to India in working to regain investor confidence as the prospect that the U.S. will reduce stimulus spurs capital outflows.
Najib pledged measures to tackle risks to the fiscal position after Fitch Ratings in July cut Malaysia’s rating outlook to negative, citing the nation’s rising debt and lack of budgetary reform. Moody’s Investors Service said last month the country has a “narrow” revenue base and “relatively high” government deficits, state subsidy bills and debt.
“The fuel price increase is quite substantial,” Rahul Bajoria, a Singapore-based economist at Barclays Plc, said by phone today. “This move will be taken as positive, but there is more to go. It’s probably a sign that the administration is acknowledging that there are concerns around the fiscal position and they are starting to move in the right direction. They need to do more.”
Additional measures to tackle the deficit will be announced in the 2014 budget, along with increased cash handouts for the poor to help ease the burden as the government gradually rationalizes blanket subsidies, said Najib, who is also finance minister.
“Over the longer term, a comprehensive social safety net will be introduced,” said the premier, who is due to unveil his 2014 spending plans on Oct. 25
Some state building projects with high import content will be delayed to help address the narrowing current-account surplus, said Najib. The government has yet to decide which ones, though it won’t include a planned subway in Kuala Lumpur, he said.
The surplus shrank 70 percent to 2.6 billion ringgit in the second quarter, the lowest level since at least 1999, according to government data compiled by Bloomberg.
Najib said the government currently subsidizes 83 sen a liter for RON 95 gasoline and 1 ringgit for every liter of diesel, which would have resulted in a total fuel subsidy cost for 2013 of 24.8 billion ringgit. With today’s reduction, the government will now subsidize 63 sen for RON 95 and 80 sen for diesel, he said.
The total cost to cap prices of essential goods including fuel, sugar and cooking oil, and provide for social welfare programs was estimated to decline to 37.6 billion ringgit in 2013 from a subsidy bill of 42.4 billion ringgit in 2012, a finance ministry report showed in September last year.
The ringgit has fallen 6.6 percent against the dollar this year, the fifth-worst performance among 11 most-traded Asian currencies, according to data compiled by Bloomberg.
“The ringgit is reflection of the external economy and beyond our control,” Najib said. “It is not giving us undue stress at this time being. We will focus in strengthening our economy.”