This is a story from the Associated Press today:
KUALA LUMPUR, June 5 — Malaysia’s benchmark stock index fell 2.4 percent today — and bonds and the currency reeled — after the government sharply cut energy subsidies to shore up its fiscal position.
Prime Minister Abdullah Ahmad Badawi’s government, despite its falling popularity, raised retail gasoline prices 41 percent, hiked electricity tariffs and imposed windfall taxes on independent power producers and plantation companies.
This is a much-needed long-term measure to bolster government finances, economists say, but over the short term, the move heightens concerns about inflation, the potential erosion of corporate earnings and a decline in consumer spending.
“As fuel and food are core elements in household budgets, higher fuel prices along with other price increases will reduce disposable income and demand,” said CIMB economist Lee Heng Guie.
The benchmark Kuala Lumpur Composite Index closed 2.4 percent lower at 1,223.56 points, after earlier dropping as much as 3.1 percent. Plantation stocks led the losses, and dealers said the market is expected to remain volatile this week.
Government bonds also fell on expectations a rising inflation rate would lead to higher interest rates from the central bank. The ringgit weakened to 3.2650 against the US dollar, from 3.2430 yesterday.
CIMB’s Lee raised his 2008 inflation forecast to 4.7 percent, from 3 percent previously, and cut his economic growth target to 5.3 percent from 5.8 percent. The government forecasts growth at between 5 and 6 percent this year.
Anindra Mitra, senior analyst with Moody’s Investors Service in Singapore, though, said Malaysia is “well-positioned” to deal with inflationary pressures and that the price hikes won’t adversely affect the country’s credit profile.
“The momentum of the economy is strong. I think they could live with slightly tighter monetary policy,” he said. But Moody’s is still assessing whether it will have a long-term impact on the economy.
Bank Negara Governor Tan Sri Zeti Akhtar Aziz said today that inflation is expected to rise to 5 percent this month, from 3 percent in April. She said it is likely to average 4.2 percent for the full year but ruled out any interest rate hike in the near term.
Most economists however, expect the central bank to raise interest rates by 50 to 75 basis points by the year end. Interest rates have been unchanged for two years.
Subsidies have until now kept fuel prices in Malaysia, a net oil exporter, among the lowest in Southeast Asia.