Budgetary pressures have forced some governments across Southeast Asia to rethink fuel subsidies. This action also risks a political response and an inflationary blow to the respective economies.
More recently, Malaysia and Thailand have allowed diesel prices to rise over the past few weeks to ease the burden on public finances as global crude oil prices rise.
In fact, Indonesia is now considering rationalizing fuel subsidies to give freedom in the latest stimulus program. However, the proposal must have received opposition from the people because of the concern over the surge in prices of basic necessities.
Although inflation remains the main risk after the withdrawal of fuel subsidies, this unpopular move will also have a negative impact on the political position.
This will cause public discontent and undermine the position of policymakers in continuing with plans to cut extensive fuel subsidies in order to protect the investment grade rating.
The position of the Prime Minister of Thailand, Srettha Thavisin is further deteriorating after the withdrawal of subsidies and rising inflation. This also weakens the implementation of interest rate cuts by the government as emphasized by the central bank before.
However, Malaysian Prime Minister Datuk Seri Anwar Ibrahim had time to hype the economic benefits with fiscal prudence. He cited the reaffirmation of Malaysia's sovereign credit score by S&P Global and Fitch Ratings as an illustration of how well the government is managing the economy and attracting more foreign investors.
Malaysia's fiscal benefits have many advantages among regional countries because fuel subsidies cost 2% of the Gross Domestic Product (GDP) in 2023 amounting to RM35 billion.
Annual savings could be substantial as the government targets the most widely used RON95 petrol later this year.
It is an important move as Malaysia struggles to organize its finances after the pandemic. This also aims to reduce its budget deficit from 5% of GDP last year to 3% by 2026 to 2028.
The fallout from higher energy prices may cause Bank Negara Malaysia to pause when it reviews its monetary policy setting next week.
