Stronger ringgit and softer oil prices position Malaysia to phase out fuel subsidies

KUALA LUMPUR - The stronger ringgit coupled with softer oil prices of late present a good opportunity for Malaysia’s government to remove petrol subsidies, a key plank of its economic reforms, say analysts.

Malaysian Prime Minister Anwar Ibrahim said in October 2023 that his administration intends to float the price of the heavily subsidised petrol known as RON95 as part of reforms needed to bolster government finances, but has yet to announce an implementation date.

The ringgit has recently outperformed the world’s currencies, appreciating over 14 per cent versus the US dollar in the third quarter of 2024. For the year to date, the ringgit has appreciated over 8 per cent against the US dollar to close on Oct 4 at RM4.21, from RM4.59 at the beginning of 2024. The local currency also strengthened against the Singapore dollar by more than 6 per cent to RM3.24 on Oct 4 from RM3.47 on Jan 1.

Economists say that the government should capitalise on the stronger ringgit and moderate oil prices currently to rationalise fuel subsidies, which currently cost it between RM15 billion (S$4.6 billion) and RM20 billion annually. The stronger local currency translates into cheaper oil imports which are traded in US dollars, and ultimately leads to reduced pump prices for consumers.

“Timing-wise, the stronger ringgit and current oil prices provide an opportune time for the government to implement targeted RON95 subsidy rationalisation as the fuel subsidies will also be lower now due to lower oil prices and the stronger ringgit, barring a sustained oil price shock from the ongoing military conflict in the Middle East,” said Socio-Economic Research Centre executive director Lee Heng Guie.

The government should reduce RON95 subsidies gradually to best manage the impact on inflation and the economy, rather than fully floating the pump prices, Mr Lee told The Straits Times.

Global oil prices edged upwards to around US$77 a barrel on Oct 4 as concerns mounted that a widening regional conflict in the Middle East could disrupt global crude flows. Nevertheless, economists say that oil prices are still considered soft and well below the April levels of US$90 a barrel when Iran first launched missiles and drones at Israel.

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.

The removal of RON95 subsidies has remained off the table since Datuk Seri Anwar’s government implemented targeted diesel subsidy cuts in June, which led to widespread public and business dissatisfaction.

The move, which affected a smaller segment of the population, resulted in diesel prices surging by 56 per cent to RM3.35 a litre from the previous subsidised rate of RM2.15 a litre.

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 told ST.

Mr Anwar’s administration has already phased out other subsidies, in the form of electricity tariff adjustments and removal of price controls for chicken.

Removing RON95 subsidies will have a deep impact on the population, as petrol is more widely used than diesel.

The former Najib Razak government had in 2014 begun to float fuel prices gradually. 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.

The government could mitigate the impact of higher pump prices by issuing cash handouts to low-income groups, said Mr Ravindran Navaratnam, co-founder of debt restructuring advisory firm Sage 3.

“It can use the savings from the eliminated subsidies,” he told ST.

The appreciating local currency could also help ease imported inflation, which has driven up living expenses.

“The stronger ringgit will help contain prices of goods at current levels. This will provide relief for households who have faced rising cost of living,” said PwC Malaysia economist Patrick Tay Soo Eng.

The timing could also work well politically for Mr 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.