Good condition to phase out fuel subsidy as the current strong currency and softer oil prices - analysts

The recent strengthening of the Malaysian ringgit and lower oil prices create an ideal opportunity for the government to implement reforms by removing subsidies for the heavily subsidized petrol known as RON95. This step is crucial for bolstering government finances, but Prime Minister Anwar Ibrahim has not yet announced a specific implementation date, say analysts.

Malaysian ringgit has performed exceptionally well compared to other currencies in recent months, appreciating by over 14% against the US dollar in the third quarter of 2024 and more than 8% for the year to date.

Sunway University economics professor Yeah Kim Leng said that at current ringgit levels, the fully floated RON95 pump price is estimated to be around RM2.55 a litre, a 24 per cent increase from the existing subsidised price of RM2.05 a litre.

“This rise will be manageable for consumers. If the ringgit strengthens further, the floated pump price will dip below RM2.50,” he said a quoted from the Straitstimes.

The government has yet to postpone the removal of RON95 subsidies, following public and business dissatisfaction over targeted diesel subsidy cuts implemented in June, and the decision to cut diesel subsidies led to a significant increase in diesel prices, from the previous subsidised rate of RM2.15 per litre to RM3.35 per litre, representing a 56% surge. This move, which impacted a smaller segment of the population, caused widespread discontent and ultimately led the government to reconsider its approach to subsidy reform.

Furthermore, UOB senior economist Julia Goh said that despite complaints, the market has adjusted well to the diesel subsidy cuts and inflationary pressures have been muted.

“We maintain our 2024 full-year average inflation forecast of 2 per cent, considered to be stable and positive for now, while awaiting the announcement of further subsidy rationalisation measures, particularly for fuel,” she added.

The former prime minister Najib Razak government began gradually floating fuel prices in 2014. However, when global oil prices rose just weeks before the 2018 General Election, it chose not to raise pump prices and instead reinstated subsidies to avoid upsetting voters.

PwC Malaysia economist Patrick Tay Soo Eng also added that the current timing could work well politically for Anwar, who is set to unveil measures to address inflation and low wages at the upcoming 2025 budget announcement on Oct 18.

“The next general election is not due for another three years. This gives him enough time to soften the ground for the public to accept the removal of RON95 subsidies,” said Mr Halmie Azrie Abdul Halim, a senior analyst at political risk consultancy Vriens and Partners.