Malaysian fuel reform to hit economy, anger voters
By Liau Y-Sing
KUALA LUMPUR, Jan 7 (Reuters) - Malaysia is likely to push through cuts in fuel subsidies this year as high crude prices burn a hole in its budget, but that risks depressing consumer spending and alienating voters in what may be an election year.
Malaysians have propped up the economy with their spending as exports have slumped. Government expenditure has created jobs and pushed up incomes, with the result that private consumption in the third quarter was 14 percent higher than a year earlier.
Other Asian countries face rising energy bills but Malaysia has particularly high subsidies — petrol prices at just above $0.50 a litre are about half those in Singapore and India — and cutting them back will hurt.
“Everyone has a vehicle of one kind or another and higher prices mean less expenses for other things,” said Mohamed Ariff, head of the Malaysian Institute of Economic Research.
He forecasts that economic growth could slow to 5.4 percent this year from the official target of 6 percent in 2007, in part due to weaker consumer spending.
Malaysia wants to restructure subsidies so that only the poor benefit from them, but no details have been given yet.
The stakes are high for the government of Prime Minister Abdullah Ahmad Badawi, whose support has already been eroded by racial tension, alleged discrimination against non-Muslims and complaints of corruption among civil servants.
“Politically, this will reduce support in the urban areas, across races,” said Bridget Welsh, a political scientist at Johns Hopkins University. “Urban sectors and East Malaysia will be harder hit. These areas have significant pockets of poverty.”
Street protests and a plunge in the government’s popularity the last time it raised petrol prices in 2006 may make it difficult to fully wean the country off its dependence on cheap fuel.
But government finances do not allow for much of a delay.
Malaysia is a net oil exporter — selling high-grade Tapis and importing lower-grade crude from the Middle East — and its oil revenue has soared as crude has climbed to $100 a barrel.
For every $1 rise in the price of crude, the government gains about $75 million a year in revenue.
But it spends $4.5 billion a year on fuel subsidies — about a tenth of total government revenue in 2007 — to keep pump prices among the lowest in Asia.
It has traditionally depended on earnings by state oil firm Petronas to help pay for subsidies but a growing offshore exploration bill means it has less cash to spare.
In addition, it plans a big increase in development spending, even though government finances have been in deficit since 1998.
Some 39 billion ringgit ($11.8 billion) is to be spent on sectoral development this year — about 50 percent more than in 2000 — including electronics, health and education hubs in southern Johor state, as the authorities boost domestic activity to cut the reliance on exports.
CHEAP FUEL
Cheap energy underpins the economy, driving fishermen’s boats and powering factory machinery.
But artificially low prices have led to wastage and pollution: Kuala Lumpur’s roads are chock-full of cars, buses and trucks, while lights and air conditioners routinely run through the night in empty offices.
Carbon dioxide emissions in Malaysia rose by 221 percent from 1990 to 2004, the highest increase among the world’s top 30 carbon dioxide emitters, according to the United Nations.
Countries including the United States, Brazil, India and China have begun using bio-fuels such as ethanol to cut their dependence on imported oil and curb greenhouse gas emissions.
But Malaysia’s plan to use alternative fuels has hit a snag: soaring palm oil prices caused it to delay indefinitely the launch of palm-blended diesel, since palm oil exports have become lucrative and the blend more expensive to produce.
“We are so complacent because petrol is cheap, so why worry? So there is no innovation,” said Fatimah Mohamed Arshad, who teaches agricultural marketing at Universiti Putra Malaysia.
Economist Zainal Aznam Yusof wants to see differentiated pricing for fuel, where “the rich and the upper-middle-income earners will be bearing the burden more and more of the adjustment of the subsidy scheme”. Ideas that have been floated include giving fuel subsidy vouchers to the poor and imposing more road tax on luxury cars.
All the same, higher fuel costs would push up a broad range of items, including food and transport, which would affect rich and poor alike.
Inflation jumped to a seven-year high of 4.8 percent when the government raised fuel prices by about a fifth in February 2006. Latest data put inflation at 2.3 percent in November.
Any change in subsidies may be delayed until after general elections, which are expected to be called in the next few months although they do not have to be held until 2009.
But a delay would hurt the government’s finances without necessarily helping it at the polls.
“A responsible government would say what it wants to do after the election,” said Zainal, who advises a government body that oversees the implementation of development plans. “You can’t dupe the electorate — they know what’s coming.” ($1=3.317 Malaysian Ringgit) (Editing by Alan Raybould)
