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Oil Report

UPDATE 1-Malaysia mulls gradual subsidy cuts to avoid backlash

* To decide on extending cuts in subsidies over 5 years

* Gradual cuts will help stem political discontent-analysts

* Cost of subisides has more than doubled since 2006 (Adds details, analysts)

KUALA LUMPUR, May 24 (Reuters) - Malaysia will hold a cabinet meeting on Wednesday to discuss plans that may see the struggling government coalition extend over five years plans to cut politically popular subsidies.

Three government sources said the meeting would likely adopt a longer timeline on reducing the subsidy bill in order to fend off a possible political backlash. The cost of subsidies has more than doubled since 2006 and the Southeast Asian country last year recorded its largest budget deficit in over two decades.

Analysts said a gradual approach could give Prime Minister Najib Razak more room to manage voter discontent following the government’s record losses in 2008 polls and reassure investors let down by previous policy u-turns. [ID:nSGE62E002]

Najib has tasked a government thinktank to come up with a series of reforms to reduce Malaysia’s bill from food, petrol, electricity and gas subsidies. Those proposals presented had envisaged cuts starting in June, with price rises every six months over a five-year timeframe, the government sources said.

“The feeling here is that the June 1 timeframe may be too soon. It has to be done moderately and in stages,” said a government source.

The effect of price rises is likely to be offset by support payments for poorer Malaysians, said the sources, who declined to be identified.

The thinktank has put the total cost of subsidies at 74 billion ringgit ($22.4 billion) annually, although that includes social welfare, health and education transfers, according to advertisements placed in newspapers.

“One issue of concern is whether to cut all in one go, or sector by sector, and the timeline,” said a second source.

Economists say a gradual approach may convince markets that Najib’s government has the political will to manage subsidy spending that rose to 24.5 billion ringgit in 2009.

That figure was 15.3 percent of total federal government spending and more than double the 10.1 billion ringgit it spent in 2006, according to official figures.

“It will be a sensible move, in my view. They have to start gradually cutting down on subsidies now or they will be forced to show their hand when its too late,” said Kit Wei Zheng, a Citigroup economist.

REFORM RELUCTANCE

Najib, who took power in April last year pledging economic and political reforms, wants to rejuvenate the coalition that has ruled this Southeast Asian country since independence in 1957.

It has lost a string of by-elections including one this month in Sarawak, its stronghold on Borneo island. ID:nSGE62307]

Since taking office, Najib has rolled back parts of a four-decade-old affirmative action policy favouring the country’s majority Malays to promote competitiveness, but met with protests from conservative Malay rights groups.

Some in Najib’s United Malays National Organisation (UMNO) party have voiced concern that the cuts could affect poorer Malays, about 55 percent of the population of 28 million, ahead of general elections that could be held by next year.

“This is not going to down well with the lower to middle income earners, which is why Najib is being cautious because it is not only the economic landscape that has changed but the political climate as well,” said political analyst Khoo Kay Peng. (Editing by Ron Popeski)

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