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Malaysia Fuel Subsidies Offer Some Reprieve From Inflation, Says Economist

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  • Malaysia is in an "enviable" position because fuel subsidies have shielded households from higher oil prices, according to an economist.
  • "Even though we're seeing this acceleration in inflation, and we're going to see higher inflation going forward, particularly into the second half ... households have in some way been shielded because of these fuel subsidies," Sian Fenner, lead Asia economist at advisory firm Oxford Economics, told CNBC's "Street Signs Asia" on Wednesday.

Malaysia is in an "enviable" position because fuel subsidies have shielded households from higher oil prices, according to an economist.

"Even though we're seeing this acceleration in inflation, and we're going to see higher inflation going forward, particularly into the second half ... households have in some way been shielded because of these fuel subsidies," Sian Fenner, lead Asia economist at advisory firm Oxford Economics, told CNBC's "Street Signs Asia" on Wednesday. She forecast that strong household spending will remain a key driver of growth in 2022. 

For Malaysia, "higher oil prices and higher energy prices … mean that they also get higher revenues," she said.

Nevertheless, she noted that while the government gets royalties and dividends from Petronas, the Malaysian oil and gas company which can bear the costs of subsidies, it would need to think about how it will "rationalize," or reduce, those subsidies.

Inflation outlook

Fenner predicted that inflation would remain fairly elevated over the next two years.

She went on to note that Malaysia's manufacturing, construction and palm oil industries are facing labor constraints despite the country reopening its borders. 

While those pressures in the labor market should be alleviated in the second half of 2023, they're "definitely a headwind" the country is facing at the moment, she added.

Though the shortage of lower-skilled workers is starting to ease, rising wages present a dilemma for Malaysia's central bank when it comes to interest rates, she added.

Later on Wednesday, Malaysia raised its key interest rate by 25 basis points to 2.25% — its second hike this year — to curb inflation.

"Inflation did accelerate in May. And what the inflation results also showed is that we're getting a broadening in inflationary pressures. So it's not just food. It's not just on the energy side or transport side, but it's also going through into recreation and accommodation. And that really is a reopening impact," Fenner said.

The political uncertainty in Malaysia — where a general election is expected to be announced soon — is an "ongoing risk," she said, adding that businesses are going to "sit on the fence" to see how the situation unfolds.

 

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