Malaysia: Government Cuts Fuel Subsidies to Plug Budget Gap


Malaysia’s economy grew by a slower-than-expected 4.3% (y-o-y) in Q2, which was only a mild improvement on the previous quarter’s 4.1% gain. Growth was buoyed by firm domestic demand, thanks in particular to higher government spending ahead of the general election. Public consumption rose significantly to 11.1% (y-o-y) in Q2, up from 0.1% in Q1, but public investment dropped by 6.4% over this period following a surge of 17.3% in the first quarter. As for private consumption, a robust reading of 7.2% was recorded, while private investment was up 12.7%. However, the overall disappointing growth performance prompted the government to cut its 2013 growth forecast to 4.5-5% from 5-6% earlier.

Meanwhile, Malaysia’s external accounts have been in the spotlight recently after the current account surplus narrowed sharply to US$0.8bn in Q2, down from US$2.8bn in the previous quarter, owing to the dwindling surplus on the trade balance. In Q2 the trade surplus moderated to US$6.1bn compared to US$8.0bn in Q1 amid lower exports. The country’s external sector woes are also being compounded by persistent fiscal deficits on the domestic front. Amid fears this could undermine investor confidence in the country, the Malaysian government took an important step to try and reduce its budget deficit, by cutting fuel subsidies for the first time in more than two years in September. The Prime Minister, Najib Razak, said the cuts would translate into savings of around 3.3bn ringgit a year – previously the government spent 24bn ringgit on fuel subsidies a year. This move, however, has raised concerns that inflation may accelerate in the coming months. Growth forecasts have edged lower for this year and next, while inflation is expected to accelerate slightly in 2014.

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