Malaysia’s Najib Raises Fuel Prices to Trim Budget Gap

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 rose 20 sen to 2.10 ringgit ($0.64) a liter after Prime Minister Najib Razak announced the change yesterday in Putrajaya, outside of Kuala Lumpur. Diesel was put up 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.

Najib pledged measures to tackle risks to Malaysia’s fiscal position after Fitch Ratings in July cut its rating outlook to negative, citing rising debt and lack of budgetary reform. 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.

“The fuel subsidy reduction is a first, small step ahead of possible additional measures to shore up public finances, Andrew Colquhoun, a Fitch senior director of sovereign ratings, said in an e-mailed report today. “Further steps to improve fiscal sustainability and long-term macroeconomic stability could see the ratings revert to stable outlook.”

Moody’s Investors Service said last month the country had a “narrow” revenue base and “relatively high” government deficits, state subsidy bills and debt.

Current Account

The ringgit fell 0.4 percent to 3.2863 per dollar as of 5:15 p.m. in Kuala Lumpur today. Malaysian officials signaled last week they were preparing measures to strengthen the budget position as the currency touched a three-year low.

“The external environment is increasingly challenging,” said Najib yesterday. “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.

Banks including RHB Capital Bhd. and Malayan Banking Bhd. today raised their inflation forecasts for this year and next to reflect higher fuel costs.

Inflation may accelerate to 2.2 percent in 2013 from an earlier estimate of 2 percent, Peck Boon Soon, an RHB economist, wrote in a report. The government might raise pump prices twice next year, pushing the consumer price index up 3.2 percent in 2014, he said.

‘Positive’ Move

“The fuel price increase is quite substantial,” Rahul Bajoria, a Singapore-based economist at Barclays Plc, said by phone yesterday. “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.

Rates Impact

“The monetary bias for 2014 is now tilted towards slight tightening of 25 basis points should global growth strengthen in a synchronized manner,” Sia Ket Ee, an economist at Hong Leong Financial Group Bhd., wrote in a report today.

Malaysia left benchmark interest rates unchanged at 3 percent for a 13th straight policy meeting in July. The central bank is likely to continue to hold borrowing costs to support growth on Sept. 5, according to a Bloomberg News survey of 17 economists.

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 yesterday’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.

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