This article first appeared in The Edge Malaysia Weekly on May 27, 2024 - June 2, 2024

THE cabinet has agreed to rationalise fuel subsidies, starting with diesel in Peninsular Malaysia, to save around RM4 billion a year, which will be redirected to helping those deserving of aid, Prime Minister Datuk Seri Anwar Ibrahim said in a national televised address on the evening of May 21.

His stance on blanket subsidies was noticeably stronger relative to what he told an international audience just one week earlier at the Qatar Economic Forum on May 14 — that Malaysia “will do it (rationalise fuel subsidies) at the right time, when we are prepared”.

While there was disappointment that Anwar still did not say exactly when fuel subsidy rationalisation would happen, expectations are for details of the timeline — at least for diesel — to be made available before he tables Budget 2025 in less than five months, on Oct 11 this year.

To further convey the message that the Anwar-led unity government is serious about implementing reforms and “has staying power”, the timeline for diesel rationalisation “should come soon”, says an observer.

“Diesel should be much easier to do, having excluded Sabah and Sarawak, and having committed to still providing targeted subsidies for diesel users like fishermen, taxis and so on in the peninsula … The real test is RON95 [since not many consumers use diesel cars],” the observer says, noting that expectations “of something happening” to roll back blanket subsidies have been higher since the Pakatan Harapan coalition’s win in the Kuala Kubu Baru (KKB) state seat on May 11.

A 50 sen reduction in subsidies for RON95 fuel, which would raise the price to RM2.55 per litre from RM2.05 per litre, could bring RM1 billion in savings a month. This would still be close to RM1 below the price of RON97, which is currently sold at RM3.47 per litre.

Cars with 40-litre fuel tanks, like Toyota Vios, Honda City or Perodua MyVi, would see a full tank of RON95 go from RM82 to RM102, should the retail price for RON95 go up by 50 sen from RM2.05 per litre, back-of-the-envelope calculations show.

At RM2.15 per litre, the price of diesel in Malaysia is among the top 10 lowest in the world, and half the price in neighbouring Thailand and Indonesia and quarter the price in Singapore, according to prices in 168 countries and territories compiled by GlobalPetrolPrices.Com as at May 20 (see Table 1).

Similarly, the price of RON95 in Malaysia, which has been kept at RM2.05 per litre for almost six years since June 2018, is the ninth cheapest among countries and territories compiled, with RON95 sold at between two to 2.5 times higher in Vietnam, Indonesia and the Philippines; 2.75 to 3.4 times higher in Cambodia, Thailand, Myanmar and Laos and nearly five times more in Singapore (where diesel is cheaper than RON95).

“The government has long indicated instances of diesel smuggling, which is essentially the primary target in the initial phase of fuel subsidy rollback … so there should be no excuse of that not happening soon,” a market watcher says, referring to how the sale of subsidised fuel has surged more than 50% since 2019 while the number of diesel vehicles has hardly risen.

“The leakage of diesel is RM100 million to RM150 million a month, which means the government could potentially, double again the SARA (Sumbangan Asas Rahmah) targeted assistance (totalling RM700 million) for the 700,000 most vulnerable to whom cash aid has been doubled from RM600 to RM1,200,” the market watcher adds.

Success in cutting its outsized blanket subsidies bill in favour of more targeted subsidies and social assistance should bolster investor confidence in Malaysia’s fiscal standing and, in turn, the ringgit.

While there is understandably “political nervousness” about removing blanket fuel subsidies, given the public uproar in June 2008 when petrol prices were floated overnight during former prime minister Tun Abdullah Ahmad Badawi’s administration, observers note that Malaysia’s ability to deliver targeted aid should have vastly improved over the past 16 years, taking into account lessons from the Covid-19 pandemic and the creation of the Central Database Hub (PADU).

“If you had followed (both televised statements), Anwar has said fuel subsidy rationalisation needs to happen … the question is how to proceed without punishing the poor,” says an observer, who reckons that a timeline would be made known “once (Putrajaya) figures out how to dispense the cash aid to whom and how much”.

“The messaging is especially important for the middle class, who might be deemed to be among the top 20% (T20), or even the top half of the M40 (middle 40%), but is struggling with the high cost of living and feel that they should also get subsidised petrol … This group would likely be the hardest hit when the RON95 price moves higher,” he adds.

“The bottom 40% of households (B40) may well be the largest beneficiaries”, given that they are likely to get more cash transfers when blanket subsidies are rationalised in favour of targeted aid while actually enjoying smaller amounts of blanket fuel subsidies compared with the M40 or T20. Only 15% or RM6.8 billion of RM45.2 billion blanket fuel subsidies in 2022 went to the B40 compared with 32% to the M40 and 53% to the T20, going by estimates from a Bank Negara Malaysia study (see Chart 1).

Rather than just emphasising how blanket subsidies benefit the “ultra-rich” and over 3.5 million foreigners in Malaysia, experts say there is a need for Putrajaya to better articulate why subsidy reforms matter to the man in the street.

“Malaysians should understand that they stand to lose more from a weak ringgit, under-funded healthcare system and under-investment in the country’s strategic capabilities … all these are more than what people think they gain by piling political pressure to keep petrol prices artificially low,” a seasoned observer explains.

Indeed, an outsized subsidies bill essentially takes away limited government resources that could otherwise be spent more productively like better healthcare and education.

Subsidies for petroleum-related products spiked from RM10.02 billion in 2021 to above RM45.18 billion in 2022, some 67.1% of total subsidies and social assistance under operating expenditure. Another RM6.67 billion was spent on subsidies on petroleum products and cooking oil charged to the Special Covid-19 Fund, according to the 2022 Auditor-General’s Report (see Table 2).

Fuel subsidies for 2023 are likely even higher, with total subsidies being more than RM81 billion last year. Subsidies and social assistance rose to RM67.36 billion in 2022 and RM71.87 billion in 2023, being 23% of the federal government’s operating expenditure for those two years compared with between 9% and 13% from 2015 to 2021, official figures show (see Chart 2).

Thanks to the surge in subsidies, subsidies and social assistance overtook debt service charges and retirement charges to become the second-largest spending after emoluments in 2022 and 2023.

Already, interest payments on the federal government’s over RM1 trillion debt pile, which makes up 16 sen of every ringgit Putrajaya expects to earn in 2024, are easily double of what is spent on the health and education portion in development expenditure (see Chart 3).

The rationalisation of diesel subsidies is not expected to cause a significant rise in inflation, say economists who are closely tracking newsflow on RON95 subsidies.

Brent crude oil is currently hovering closer to US$80 per barrel compared with near US$90 per barrel in April.

In a note dated May 20, CGS International economist Nazmi Idrus says at most, this year’s fiscal deficit “could decrease from 4.3% of GDP to 3.8% of GDP, assuming RM10 billion in savings from diesel fleet card deployment and the floating of diesel prices”.

Anwar’s estimate of RM4 billion savings from diesel subsidy rationalisation in his May 21 speech may have accounted for savings being redirected in the form of cash assistance. Coupled with RM4 billion savings from taking away electricity subsidies from high users and businesses (15% of total users) and RM1.2 billion savings from pulling chicken and egg subsidies, there are already significant savings of more than RM9 billion.

Given expectations of a 15% salary hike for civil service come December, with lower-ranking ones likely getting higher increases, Putrajaya needs to get more savings from plugging leakages as well as further grow its revenue stream.

Incidentally, come Dec 5, the unity government that Anwar leads would have remained in power for the first two of its mandated five-year parliamentary term.

Rationalising blanket fuel subsidies, while deemed a tough political challenge, is seen as the “first real test” for the unity government by the broader investment community. Seen in that light, failure is not an option.

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