Malaysia Planning More Fuel Subsidy Cuts Amid Scandal Which Raises Policy Risk

Malaysia is planning to cut more government fuel subsidies and move billions of dollars in government employee housing loans off its balance sheets to shore up its fiscal position, in the face of a growing scandal that is threatening Prime Minister Najib Razak’s ability to execute potentially unpopular policies, Bloomberg reported on Monday night.

The Malaysian government will gradually cut back on subsidies for petrol, liquefied petroleum gas, and cooking oil, before eventually pulling the plug in the coming years, Mohd Irwan Serigar Abdullah, Secretary General of Treasury, said during an interview with Bloomberg.

According to Mohd Irwan, the government is also creating a statutory body that will take over the housing loans that the government is currently managing for its civil servants, which will move around 40 billion ringgit ($10.5 billion) into off-balance-sheet liabilities and thus reduce the government’s debt-to-gross domestic product ratio.

The planned government moves come as Fitch Ratings decided last week not to downgrade Malaysia’s credit ranking and maintain a grade of A-, which is the fourth-lowest investment grade, after signaling a downgrade earlier this year.

Fitch also upgraded Malaysia’s outlook to stable from negative on improving finances — aided by its new consumption tax and fuel subsidy reforms — and steady growth.

The decision by Fitch came after the Malaysian government outlined its plans for fiscal consolidation and sustaining the current-account surplus, assuring the company that the country will avoid a twin deficit situation, Mohd Irwan said.

Despite the government’s efforts to improve its finances, another challenge has emerged as Prime Minister Najib faces his biggest crisis since coming to power in 2009 amid accusations that he has misappropriated funds.

A task force is investigating a money trail of some $700 million that allegedly showed funds ending up in Najib’s bank accounts, according to The Wall Street Journal (WSJ).

Najib has rejected such accusations and said it is political sabotage.  “I am not a traitor and will not betray Malaysians and Malaysia,” Najib said on Sunday.

Malaysia’s efforts to improve its budget have also been overshadowed by a debt pile-up at the state investment firm 1Malaysia Development Bhd. (1MDB), in which Najib founded and heads its board of advisors, as the firm has amassed $11 billion in debt that it is struggling to repay, according to the WSJ.

However Mohd Irwan has reiterated that 1MDB is sound and has sufficient assets to repay its debt, but scrutiny has increased over exactly how much liability that the government may have beyond its official borrowings.

Malaysia scaled back on subsidies for gasoline and diesel last year as falling oil prices offered Najib a window of opportunity to help wean the country off its decades-old policy of cheap fuel.

“We cannot afford to be in subsidy mode forever … we are at a point where there are too many subsidies and the government budgetary system can’t afford to carry such a burden,” Mohd Irwan said.