PETALING JAYA: The targeted diesel subsidy rollout could lead to an upgrade in Malaysia’s sovereign credit rating as it shows the government is serious about economic reforms and fiscal consolidation, said an economist.

Prime Minister Anwar Ibrahim aims to replace broad subsidies, which cost the country RM81 billion last year, with targeted assistance to help reduce the 2024 budget deficit to 4.3% of the gross domestic product from 5% in 2023.

The diesel subsidy in Peninsular Malaysia was lifted on June 3, with its price rising from RM2.15 to RM3.35 per litre. However, the Budi Madani programme provides monthly aid of RM200 to selected vehicle owners and businesses to offset the higher pump prices.

Bank Muamalat Malaysia Bhd’s chief economist, Afzanizam Rashid, said while the diesel subsidy retargeting has understandably drawn criticism, it sends a signal to international credit rating agencies such as Moody’s, Fitch Ratings, and S&P Global Ratings that the government is following through on its subsidy rationalisation plans.

Afzanizam said a good sovereign credit rating can contribute to a country’s economic stability and growth by lowering borrowing costs, increasing investor confidence, and improving access to capital markets.

Countries with higher credit ratings are perceived as lower risk by investors. This perception allows them to borrow money at lower interest rates in the international bond market, thus reducing the cost of servicing debt and making it cheaper for the government to finance its operations and projects.

A favourable credit rating also enhances investor confidence in the country’s economy and financial stability, which attracts both domestic and foreign investment and fosters economic growth and development.

“When governments demonstrate financial discipline, they will get a good review from ratings agencies and a better outlook moving forward,” he said.

“Credit rating agencies conduct annual reviews, and this (diesel subsidy retargeting) will be taken into consideration when they conduct their next review.

“We are now rated as ‘stable’, but if fiscal consolidation gains more traction, I won’t be surprised if our rating moves from ‘stable’ to ‘positive’, and that will be good for our bond market.”

Last year, Moody’s affirmed Malaysia’s sovereign credit rating at “A3 with a stable outlook”, with Fitch Ratings providing a “BBB+ with a stable outlook” rating, and S&P Global Ratings assigning a “A- with a stable outlook” rating.

Crucially, all three credit rating agencies pointed out the importance of reducing the country’s subsidy bill and more astute spending when announcing last year’s rating.

Fitch predicted the government deficit will decline to 3.5% in 2025 amid subsidy rationalisation, and Moody’s highlighted the need for reforms to “rigid expenditure commitments” such as subsidies. S&P Global Ratings noted its rating was partly underpinned on Malaysia’s political commitment to resume fiscal consolidation post-pandemic.

The targeted diesel subsidies are the third step in the government’s efforts to restructure subsidy allocations following the RM4.5 billion savings from electricity tariff adjustments and RM1.2 billion savings from floating the prices of chicken and eggs.

Universiti Malaya senior economics lecturer Goh Lim Thye said the large amount spent on subsidies, which Anwar described as the highest in Asia, is a setback for Malaysia in its push towards becoming a developed nation as the funds cannot be allocated for development purposes.

He said the retargeting of the diesel subsidy, which will save about RM4 billion annually, will help reduce public expenditure and alleviate budget deficits.

“The retargeting of the diesel subsidy signifies the government’s commitment to fiscal consolidation and long-term economic stability,” Goh told FMT.

“This policy shift is part of the 2024 budget, which projects a reduction in spending on subsidies and social assistance from RM64.2 billion in 2023 to RM52.8 billion in 2024, underscoring a strategic focus on improving the country’s fiscal health.”