Malaysia’s Oil Price Hike Makes Little Impact on Rating

It may push inflation to 3% on the month though

The Prime Minister of Malaysia, Datuk Seri Najib Tun Razak, announced the Government’s decision to increase fuel prices last Monday. The price increase of RON95 and diesel by 20 sen to RM2.10 and RM2 per litre is one of the Government’s measures to rationalize subsidies. This is the first price hike since the Government last raised them in 2010.

In an effort to tame the fiscal deficit, it expects to save RM3.3bil per year in subsidy bills with RM1.1bil of savings this year from September to December. The exercise is targeted to diminish the budget deficit to 4% this year, 3.5% in 2014 and 3% by 2015. Aside from easing the country’s fiscal situation, the price increase may spark an inflation rate of 3% this month. The rate of inflation is now expected by economists increase by between 3% and 4% until the end of the year.

However, with the low inflation rate of 1.7% in the first part of the year, the overall inflation for 2013 will most likely average 2.0% to 2.5%.“The country’s inflation would remain below 3% only if businesses decide not to take advantage of the situation. So far, I think it is still within a reasonable quantum,” said Minister in the Prime Minister’s Department Datuk Seri Idris Jala at the 5th National Energy Forum press conference.

He called the timing to make the change the “fiscally right thing to do.” Fitch Ratings service, nonetheless, remarked that the fuel subsidy reduction was “too small” yesterday. Malaysia’s A- sovereign rating and “negative” outlook was unchanged by the exercise.

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