Malaysian Subsidy Review May Signal Vote Delay as Oil Rises

Faztu Sabtu, a pharmacy supervisor in Kuala Lumpur, has about 100 ringgit ($33) left every month after paying for rent, food, fuel, groceries and utilities. That may soon dwindle.

Malaysia has been discussing whether to trim subsidies for gasoline, diesel and electricity, which could result in higher prices. A proposal to change power rates will be re-examined and presented to the government again, Energy, Green Technology and Water Minister Peter Chin said after a cabinet meeting today. Officials didn’t decide on fuel prices today, the domestic trade minister said separately.

“The government is making our lives more complicated,” said Faztu, 20, whose salary of 1,090 ringgit a month would take him three years to purchase a Proton Saga FL sedan. “I would be quite upset” if fuel and power prices rise, he said.

Faztu’s plight shows the dilemma for Prime Minister Najib Razak, who needs to keep the budget deficit under control without allowing an inflation spiral that would alienate voters. A 45 percent jump in oil costs in the past year has increased pressure to raise state-controlled prices, which may prompt Najib to delay holding an election until next year, said Manokaran Mottain, a senior economist at AmResearch Sdn.

“The government is in a difficult position,” said Kuala Lumpur-based Manokaran, who expects the government to raise the price of RON95 gasoline by as much as 20 sen a liter after the subsidy review. “If the government does not do anything now, it has no other choice but the fiscal deficit will be widening.”

Unchanged for Now

The price of gasoline, diesel and liquefied petroleum gas remains unchanged for now as the cabinet didn’t make any decisions today, Domestic Trade, Cooperatives and Consumerism Minister Ismail Sabri Yaakob said in a mobile-phone text message after a minister’s meeting. He told Bloomberg News last week the matter would be discussed today.

Fuel prices will be addressed by the National Economic Council on May 27 after the cabinet held off from a decision today amid public concern, the Malaysian Insider reported online, citing Ismail Sabri.

Analysts including Ibrahim Suffian, a political analyst at the Merdeka Center for Opinion Research based near Kuala Lumpur, predicted earlier this year that Najib could call for an election as soon as this year.

Budget Target

Najib, whose government’s term ends in early 2013, said in June he aims to slash the budget shortfall to 2.8 percent of gross domestic product in 2015, from a 22-year high of 7 percent in 2009. Part of the plan includes trimming subsidies, estimated by the prime minister in 2010 at about 73 billion ringgit a year for essential items ranging from fuel to flour.

The government forecast in October the 2011 deficit will narrow to 5.4 percent of GDP from 5.6 percent last year. That was before oil surged to above $100 a barrel this year. Last week, Deputy Prime Minister Muhyiddin Yassin said the subsidies bill for this year is likely to rise to 20.6 billion ringgit from 10.3 billion ringgit in 2010 amid rising crude prices.

Inflation accelerated to a two-year high of 3.2 percent in April after the government cut subsidies on fuel and sugar in December, boosting retail prices. Earlier this month, the government further cut state sugar subsidies by 20 sen per kilogram, a move Ismail Sabri said will result in budget savings of 116 million ringgit per year.

The central bank raised interest rates for the first time since July this month.

Domestic Needs

Najib, 57, said in March he would consider slowing subsidy cuts to shield consumers from rising prices, noting the government needs to “satisfy the confidence of the global market towards Malaysia and at the same time we have got some domestic considerations.”

The prime minister’s approval rating fell to 69 percent in December from 72 percent in May last year, after the government raised fuel and sugar prices, according to a voters’ opinion poll released by the Merdeka Center.

The Consumer Sentiment Index moderated to 108.2 in the first quarter from 117.2 in the fourth quarter of 2010, partly due to accelerating inflation, the Malaysian Institute of Economic Research said April 14.

“Consumers’ confidence, especially with respect to inflation, has been declining,” said the Merdeka Center’s Ibrahim, who added that any increase in gasoline prices would probably mean Najib will refrain from calling for a vote this year. “It is going to become a defining issue if election is going to be held sometime soon.”

Responsible Policy

While any move to reduce subsidies will hurt the government’s popularity, responsible policy makers need to ensure the country doesn’t follow European nations like Greece and Portugal, which needed bailouts to avoid defaulting on their debt, Deputy Prime Minister Muhyiddin was cited by Bernama as saying yesterday.

That message may not appease Malaysians such as Shamdeswary Davendran, whose husband works in neighboring Singapore to boost the family income.

Shamdeswary, a 36-year-old mother of two who teaches psychology at a college in Malaysia, fed her son milk powder after he was born three years ago. A more than 25 percent jump in infant milk powder prices since then has prompted her to breastfeed her eight-month-old baby girl now.

“I have to switch to cheaper alternatives,” Shamdeswary said while shopping for groceries at Giant supermarket in Kuala Lumpur on April 19. “We’re left with no choice because we just can’t survive with the salaries that we are earning here.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE