Malaysia May Subsidize Fuel for a Decade, Constraining Budget

By Ranjeetha Pakiam and Angus Whitley

July 30 (Bloomberg) -- Malaysia's government may subsidize gasoline at the pumps for another decade in an attempt to regain public support, limiting its ability to cut the budget deficit.

``If we can fix the economy and make the turn, then 10 years is reasonable,'' Domestic Trade and Consumer Affairs Minister Shahrir Samad said in an interview yesterday. Before that, the Southeast Asian nation may reduce gasoline prices after raising them in June as crude falls from records, he said.

Asian countries from India to Indonesia have raised fuel prices as crude oil rose 63 percent over the past year, swelling subsidies. Malaysia's Prime Minister Abdullah Ahmad Badawi, whose ruling coalition had its worst electoral performance in March, has backed off from a plan to allow local fuel prices to track international market rates since announcing a 41 percent increase in gasoline costs in June.

``The 10 years is maybe just to soothe public sentiment,'' said Joanna Tan, an economist at Forecast Singapore Pte. ``They're trying to get a grip on their support. It's up to the government whether they have the political capital'' to increase prices, Tan said.

Abdullah has promised to avoid another fuel-price increase this year after the June move, which pushed inflation to a 26- year high of 7.7 percent last month. The premier's ruling coalition lost five states to the opposition alliance in the March 8 elections.

May Cut Prices

The government may cut gasoline prices should crude oil drop below $125 a barrel for at least three weeks, said Shahrir, who tracks the crude price daily. Such a reduction may come as early as this year to enable the government to keep its pledge of maintaining a 30 sen (9 cents) subsidy on every liter of gasoline, he said.

Shahrir declined to provide a specific oil price that might trigger a cut in domestic fuel prices.

Additional years of subsidies, after a decade of budget deficits, would force the government to seek funds from the bond market, said Tan at Forecast Singapore.

The government may revise its target of cutting the budget deficit to 3.1 percent of gross domestic product in 2008, Second Finance Minister Nor Mohamed Yakcop said June 30. Malaysia has posted a budget shortfall every year since 1998 and reduced the figure to 3.2 percent of GDP last year.

To contact the reporters on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net; Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.net