Malaysia flags fuel price hike as oil rallies

Reuters (2/11/2007): Record oil prices may force Malaysia to raise domestic fuel prices to reduce the cost of government subsidies for the sector although economic growth would not suffer, government ministers said on Thursday.

Malaysia, a net oil exporter, last raised fuel prices by about a fifth in February 2006, driving inflation to a seven-year high of 4.8 percent the following month. Annual inflation stood at 1.8 percent in September this year.

Trade Minister Rafidah Aziz said it was not viable for the government to maintain fuel subsidies at current levels, Malaysia's official news agency reported.

The private sector was told six months ago of a potential increase in fuel prices, she told Bernama in Zurich, where she is leading a trade delegation.

"They accept the fact," Rafidah was quoted as saying. "They are pragmatic, and only hope the increase won't be too steep."

Benchmark U.S. crude hit a record high on Thursday above $96 a barrel. The latest rally was sparked by concerns of a supply crunch in the United States this winter, but oil demand has surged globally following several years of rapid economic growth and the emergence of India and China.

Malaysia's government sets pump prices to ensure they remain relatively low, paying out subsidies to fuel retailers who struggle to make money at fixed prices.

Overall, the government gains from higher prices, reaping 250 million ringgit a year in revenue for every $1 rise in the crude price, Second Finance Minister Nor Mohamed Yakcop said.

"Net-net, there's a positive gain," Nor Mohamed told reporters after opening a conference.

ECONOMIC GROWTH ON TRACK

He said the government was certain of meeting its economic growth forecast of 6 percent for 2007 and 6-6.5 percent for 2008.

"For the immediate term, it has no effect on our forecast certainly for this year," he said. "We are keeping 6 percent. "We are very confident that next year, we will get 6 to 6.5 percent," he added.

However, higher pump prices raised the spectre of quickening inflation and slower economic growth, economist Suhaimi Ilias said.

"One thing for sure, the impact on inflation will be there," the chief economist of Aseambankers said. "We estimated that every 10 sen increase in fuel prices can boost inflation by about 0.3 percentage point on a year-average basis."

"The worry is on the consumer spending growth momentum because there is a possibility that this could dampen the consumer spirit a bit."

Nor Mohamed said that longer term he was "somewhat concerned" a sustained oil price rally could hurt many developed economies which could have a boomerang effect on Malaysia's trade-dependent economy.

"But we have over the years taken firm measures to ensure we are not over dependent on exports for economic growth," he added. He declined to say if the government was considering raising pump prices.

Rafidah said the government was studying how much of the rise in oil prices should be passed on to consumers.

The government's economic view is more optimistic than the Malaysian Institute of Economic Research .

Last week it cut its forecast for Malaysia's 2008 economic growth to 5.4 percent from its earlier projection of 5.8, citing a possible rate increase and the strength of the ringgit .

The think tank sees 2007 growth at 5.7 percent.

Crude oil prices have risen more than 50 percent since Malaysia last raised fuel prices in February 2006.