Malaysia cuts subsidies on fuel

A fuel pump in Malaysia
Image caption Subsidies on fuel are a key contributor to Malaysia's budget deficit

Malaysia has cut fuel subsidies for the first time in more than two years as it tries to reduce its budget deficit.

The subsidy on petrol has been cut by 20 sen (6 cents; 4 pence) a litre and on diesel by 20 to 80 sen a litre.

Prime Minister Najib Razak said the cuts would result in savings of about 3.3bn ringgit ($1bn; £650m) a year.

The government spent 24bn ringgit on fuel subsidies last year, which contributed to a widening budget deficit.

Malaysia's budget deficit was 4.5% of its gross domestic product (GDP) last year.

Ratings agency Fitch cited the high budget deficit as one of the factors that led it to cuts its outlook on Malaysia's credit rating to negative from stable in late August.

"It's a process of fiscal consolidation," Mr Najib said. "The market will feel more confident if we can bring down our fiscal deficit."

Defending the ringgit

The change also comes at a time when Asia's emerging economies have been hit by investors pulling their money out.

The pull-out has been triggered by speculation that the US central bank will soon begin to cut back on the amount of money it is pumping into the economy.

That has hurt currencies and stocks in some Asian countries, including Malaysia, which has seen its currency, the ringgit, decline by nearly 10% against the US dollar since May.

Some analysts said that the cut in fuel subsidies was an attempt by the government to increase investor confidence and persuade them to leave their money in the country.

"The fact the announcement was made just weeks before the annual budget shows that one of the objectives is to defend the ringgit," said Song Seng Wun of CIMB Research.

"They want to contain it from sliding further."

Inflation concerns

The subsidy cuts, which come into effect on Tuesday, mean that fuel prices in the country will rise.

That has raised some worries that consumer prices in the country may also jump in the coming months.

"Once implemented we expect the impact to inflation to be significant, but it will be transient and last for 12 months due to the one-off change," said Irvin Seah an analyst with DBS Bank.

Mr Wun said that while the move would affect inflation, the increase in consumer prices was likely to be "bearable", not least because the rate of inflation in the country is relatively low. Annual consumer price inflation in Malaysia stood at 2% in July.

He added that if prices continued to rise, the central bank had "enough room to tighten its policies" to keep inflation under check.

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