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Oversea Chinese Banking : Malaysia to End Fuel Subsidies From December Onward

11/21/2014 | 05:46am US/Eastern
   By Jason Ng 
 

KUALA LUMPUR--Malaysia said Friday it will scrap subsidies for a widely used gasoline variant and diesel beginning Dec. 1, ending a politically sensitive but costly program that has been in place for over two decades.

In its place, the government will implement a managed float system that would determine the retail price of the so-called RON95 gasoline and diesel based on global crude oil prices, Domestic Trade Minister Hasan Malek said in a statement. The same system has been used to price higher-grade RON97 gasoline in Malaysia since July 2010.

The move comes as Brent prices--the global benchmark for crude oil--recently fell to four-year lows, plunging about 30% since mid-June on concerns about ample global supplies and tepid demand growth.

Currently, the RON95 fuel is priced at 2.30 ringgit ($0.69) a liter while diesel costs 2.20 ringgit a liter.

Malaysia has been seeking to trim its long-running budget shortfall and economists have long called for the government to abolish subsidies that range from cooking oil to electricity that cost billions of dollars, although they shielded consumers from price shocks.

"Overall, it is undeniably a positive move from the government that will put the fiscal position on a more even keel," said Wellian Wiranto, a Singapore-based economist at Oversea-Chinese Banking Corp.

Malaysia raised the retail price for RON95 and diesel by 9.5% and 9.0% respectively in October, a move expected to help the government achieve its targeted deficit of 3.0% of gross domestic product by 2015, from an estimated 3.5% deficit this year.

Mr. Wiranto noted that similar to its Southeast Asian neighbor Indonesia, subsidies have taken up too much of government coffers for too long, and the savings could be used to improve public transport and hospitals.

On Monday, Indonesia raised subsidized fuel prices by roughly one-third, and economists have called for subsidies in the country to be scrapped.

Write to Jason Ng in Kuala Lumpur at jason.ng@wsj.com

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