By Amanda Lee and Fabiana Negrin Ochoa
Malaysia has started raising diesel prices as part of efforts to wind back fuel subsidies, in a move that will save the government up to 4 billion ringgit (US$852.7 million) a year.
Diesel prices across Peninsular Malaysia were raised to MYR3.35 a liter from MYR2.14 on Monday. Prices in parts of the country, including Sabah, Sarawak and Labuan, were left unchanged, the Ministry of Finance said in a statement on Sunday.
Some sectors are also being exempt from the change, including fishermen and land public transport, and will continue to benefit from subsidized prices, the ministry said. To limit higher diesel costs from feeding through into prices of other goods and services, the government has set a price ceiling for some logistics vehicles. It is also providing cash handouts, including for small-scale farmers.
The move is part of the government's plan to roll back subsidies for key items like fuel and food that have helped keep inflation in check, but are expensive to maintain.
Last year, the government spent MYR14.3 billion on diesel subsidies, it said.
The shift from a system of blanket subsidies to one of targeted price controls has been a source of uncertainty for the economic outlook, as it could reaccelerate inflation. Malaysia's central bank has said that the outlook for 2024 is dependent on the implementation of subsidy rationalization and price controls.
The move was widely expected, and on its own is unlikely to have much of an inflationary impact, analysts say.
As diesel has a weight of just 0.2% in Malaysia's consumer price index basket, the subsidy cut's direct impact is likely to be minimal, said the UOB Global Economics & Markets Research team.
"But the second-round effects still bear watching," it said in a note.
The diesel subsidy rationalization may negatively affect consumers, auto players, logistics providers, service industries, retailers, and property and construction companies, CIMB Securities analysts said in a note.
Focus is also on the next planned subsidy changes, for RON95 fuel, which many expect to have more of an impact on price pressures.
The details of the impending change are unclear, with the timing depending on factors including how the diesel subsidy cuts play out, UOB said.
"The direct and indirect effects of price hikes for RON95, which carries 5.5% weight in [the] overall CPI basket, will be more significant on inflation," it added.
Pending more developments, UOB maintains its 2024 inflation forecast for Malaysia at 2.6% for now.
Economists at CIMB Treasury & Markets Research expect a staggered recalibration of RON95 subsidies to start only in the final quarter of the year. That would give the government the chance to assess the impact of the diesel cuts using June and July inflation data.
A RON95 subsidy cut has a wider implication on household purchasing power than diesel, CIMB said. A 10% increase in RON95 retail prices would add about 0.5% to headline inflation versus diesel's 0.02%, senior economist Lim Yee Ping and head of research Michelle Chia said in a note.
On balance, Malaysia's growth and inflation trajectory continues to argue for the overnight policy rate to remain on hold through the year, the CIMB economists said.
"We maintain our OPR forecast at 3.00% as inflation will hover within official forecast of 2.0-3.5%; GDP growth recovery momentum remains intact," they said.
Write to Amanda Lee at amanda.lee@wsj.com
(END) Dow Jones Newswires
06-10-24 0143ET
