November 21, 2014 / 10:00 AM / 3 years ago

UPDATE 2-Malaysia to cut fuel subsidies to shore up finances

* Malaysia to save an estimated 20 bln rgt a year

* Fiscal deficit of GDP seen falling to 1 pct in 2015

* RON95, diesel prices to be fixed on managed float mechanism (Adds details, analyst quotes)

By Yantoultra Ngui and Anuradha Raghu

KUALA LUMPUR, Nov 21 (Reuters) - Malaysia will abolish subsidies for petrol and diesel from Dec. 1, the government said on Friday, taking a bold step that could potentially save the government some 20 billion ringgit ($5.97 billion) annually.

Malaysia joins Indonesia and India in cutting fuel subsidies amid a sharp decline in oil prices, ending decades-long policies of cheap fuel that have contributed to fiscal deficits.

Prime Minister Najib Razak has pledged to beef up Malaysia's public finances by cutting expenditure and subsidies, as well as expanding the tax base by implementing a 6 percent goods and services tax from April next year.

The price of the widely used RON95 grade of petrol and diesel will be fixed according to an automatic managed float - a system that adjusts prices according to the market rate, the same mechanism as for the price of premium petrol RON97, the Domestic Trade, Cooperatives and Consumerism Minister Hasan Malek said on Friday.

Economists have said a window has opened up for Southeast Asia to consider dismantling generous subsidies as global crude prices sink to multi-year lows.

"It's very positive for the (Malaysian) budget," Edward Lee, Standard Chartered's Regional Head of Research for Southeast Asia, told Reuters. "Then the fiscal deficit will fall to 1 percent of gross domestic product in 2015, from 3 percent. And that's quite impressive."

In recent years, Malaysia has shielded its citizens from the full brunt of surging crude oil prices with fuel subsidies of around 24 billion ringgit ($7.34 billion) annually. That had exacerbated the government's budget deficit, one of the region's biggest as a proportion of gross domestic product.

RINGGIT JUMPS

The Malaysian currency climbed 0.37 percent against the U.S dollar on Friday, the highest among Asian currencies. The benchmark stock index ended 0.72 percent lower.

Economists said the government's decision could drive up inflation next month but this would likely be capped due to the slump in global oil prices.

"Inflation might pick up in December but gains are likely to be transient," ANZ said in a note.

"The collapse in crude oil prices to around levels of domestic fuel prices means that the upside impact will be mitigated to a huge extent," ANZ said, adding that RON95 and diesel prices account for slightly less than 8 percent weight in the consumer price index (CPI) basket.

Malaysia narrowed the fiscal deficit to 3.9 percent of gross domestic product in 2013, and Najib wants to further trim the gap to 3.5 percent this year and 3 percent in 2015, heading toward a balanced budget by 2020.

"Overall, it is undeniably a positive move from the government that will put the fiscal position on a more even keel," said OCBC Bank economist Wellian Wiranto.

"It is a window of opportunity that no one really knows whether will remain in the coming months, depending on your view of global oil price."

Neighbour and Southeast Asia's biggest economy Indonesia cut subsidies and raised fuel prices by more than 30 percent this week, a move that is expected to save the government of Southeast Asia's biggest economy more than $8 billion next year.

1 US dollar = 3.3525 Malaysian ringgit Reporting By Anuradha Raghu and Yantoultra Ngui; Editing by Jeremy Laurence

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