Malaysia cuts fuel subsidies for fiscal position consolidation

But higher inflation concerns have been raised.

Fuel subsidies in Malaysai have been cut to further consolidate the fiscal position, and RON95 petrol and diesel prices have been raised by MYR 0.20 per litre to MYR 2.30 and MYR 2.20 respectively. According to a research note from DBS, the price increase was similar in magnitude to the previous hike in September last year.

And, the report noted, this is in line with the government effort to consolidate its fiscal position ahead of the budget announcement soon.

According to the Ministry of Finance, even with the reduction in the subsidy rate, the Government estimates it will still be spending over MYR 21bn to subsidise the prices of RON95 petrol, diesel and LPG for 2014.

While the surprise hike will alleviate the fiscal balance, it raises concerns about higher inflation going forward, particular with the forthcoming implementation of the GST.

Here’s more from DBS:

Henceforth, monetary policy in the medium will remain on a tightening bias. Moreover, given the impact on cost of living, expect a robust offset package to be announced in the budget to alleviate the pressure on the low and middle income households.

Among the financial aids that may be dished out will include an increase in the Bantuan Rakyat 1 Malaysia (BR1M) cash handouts to low-income households in next week’s budget announcement.

Plainly, this is in line with the government’s longer term aim of fostering fiscal sustainability and to bring fiscal deficit to below 3% of GDP by 2015.

Overall fiscal position for 2014 is expected to come within target of 3.5%.