Asia’s fuel subsidies are falling victim to budget pressures
But the countries are risking political backlash and another inflation blow to their economies
BUDGET pressures are forcing governments across South-east Asia to rethink fuel subsidies, risking political backlash and another inflation blow to their economies.
Thailand and Malaysia have let diesel prices climb in the past weeks to ease the burden on public finances as global crude prices rise. Even Indonesia is considering to rationalise fuel subsidies to free up money for new stimulus programmes.
Most have been met with resistance from citizens wary this could push up prices of basic necessities, from transport to food.
While inflation remains the biggest risk for these economies as they are weaned away from artificially cheap diesel, petrol and cooking gas, the moves could also exact a political toll.
Brewing public discontent will test policymakers’ mettle in pursuing plans of broader fuel subsidy cuts to shield investment-grade ratings.
Thai Prime Minister Srettha Thavisin’s approval ratings are already slumping, and a flare-up in inflation also weakens the case for interest-rate cuts that he’s long been pressuring the central bank for.
A NEWSLETTER FOR YOU
Friday, 8.30 am
Asean Business
Business insights centering on South-east Asia's fast-growing economies.
Thai truckers are planning a protest to demand the government bring the diesel price cap back to 30 baht (S$1.11) per litre. In Malaysia, even lawmakers from the ruling coalition have criticised the fuel subsidy reforms, saying it’s forcing businesses to shut.
Fiscal prudence
Yet Prime Minister Anwar Ibrahim has touted the economic benefits of being fiscally prudent.
He’s cited the reaffirmation of Malaysia’s sovereign credit score by S&P Global and Fitch Ratings as a reflection of how well his government is managing the economy – something that’s key to attracting investors.
The potential fiscal benefits are sizeable too. Malaysia has the most to gain among its neighbours as fuel subsidies cost 2 per cent of gross domestic product in 2023 or RM35 billion (S$10 billion), according to a Bank of America report.
Annual savings could be substantial once the government targets the most widely-used RON95 petrol later this year. That will be crucial as Malaysia struggles to get its finances in order after the pandemic, aiming to wrangle its budget deficit from 5 per cent of GDP last year to 3 per cent by 2026 to 2028.
The resulting higher energy prices might likely keep Bank Negara Malaysia on an extended pause when it reviews monetary policy settings next week.
Meanwhile, 110 billion baht worth of liabilities in Thailand’s state oil fund have pushed the government to steadily lift price caps on diesel.
“With the Oil Fuel Fund facing strain and budget revenues falling behind target year to date, it’s hard to rule out a further upward adjustment to diesel prices after the current 33 baht per litre cap ends on Jul 31,” said Krystal Tan, an economist at Australia & New Zealand Banking Group.
Price pain
There will inevitably be price pain, especially as energy costs stay volatile.
Oil prices are more than 10 per cent higher than at the start of this year as output curbs by Opec+ continue to rein in global supplies.
While subsidies or price caps can protect consumers from the brunt of fuel costs, they typically move in tandem with crude prices.
With Thailand’s higher diesel prices coinciding with a tourism rebound and the government’s cash handout programme, headline inflation could jump to 0.9 per cent for the full year 2024 from -0.1 per cent in January to May, said DBS Bank economist Han Teng Chua.
That may dissuade the Bank of Thailand from loosening monetary reins just yet and hold its policy rate at 2.5 per cent for the rest of the year, Chua said.
For Malaysia, HSBC Holdings estimates headline inflation at 2.7 per cent for 2024 and 3 per cent next year from just 1.8 per cent in January to May. It scrapped its call for a 25-basis point cut in early 2025, seeing instead a prolonged rate pause or even a greater chance of a hike.
“We believe more upside risks will likely materialise in 2025 once subsidies on RON95 fuel start, also in tandem with a 13 per cent rise in civil servants’ wages from this December,” said HSBC economist Yun Liu.
While fiscal prudence is key to economic health, rolling back subsidies especially in developing nations weigh on households already feeling the pinch.
Malaysian fisherman Fairuz Ahmad, 47, is worried about his expenses despite receiving diesel subsidies for when he goes out to sea. “Will the cost of other things such as fishing nets, auto services and basic food items also rise because of the diesel subsidy removal?” BLOOMBERG
Share with us your feedback on BT's products and services
