Malaysia: Diesel subsidy rationalisation reflects willingness for fiscal reforms
Low impact from higher diesel prices.
Group Research - Econs, Chua Han Teng11 Jun 2024
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Malaysia has embarked on its gradual fuel subsidy rationalisation plan on June 10, which in our view, reflects the government’s willingness to undertake reforms to consolidate its public finances. Second Finance Minister Amir Hamzah Azizan said that diesel prices in Peninsular Malaysia will rise by 55.8% to the market rate of MYR3.35/litre, starting from June 10, while prices in Sabah and Sarawak will remain subsidised at MYR2.15/litre. Under the targeted scheme, certain logistics vehicles, public transport and emergency vehicles, and fishermen will also be eligible for subsidised prices. More than 30k targeted recipients will also receive MYR200 monthly cash assistance from June 10. The government expects to save MYR4bn/year (~0.2% of GDP) from this move that plugs leakages of subsidised diesel. The diesel measure is just the start of the fuel subsidy rationalisation that was announced in Budget 2024. The next reform and bigger savings would be from the unwinding of blanket RON95 subsidies. Yet, the timing and magnitude of this adjustment remain uncertain, and might depend on the impact of diesel subsidy reductions in the coming months.

The direct inflation impact from the one-off diesel subsidy rationalisation is likely contained, given diesel’s small 0.2% weight in the CPI basket. Yet, the authorities, including Bank Negara Malaysia (BNM), would be vigilant of second-round price effects from any fuel subsidy adjustments. In this regard, BNM has already factored in the high inflation uncertainty from the potential implementation of domestic policy on subsidies, with its 2024 headline inflation forecast range at 2.0%-3.5%. Unless inflation significantly overshoots the top-end of its forecast, we expect BNM to remain on hold in 2024.

Chua Han Teng, CFA

Economist - Asean
[email protected]

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