The international politics and business weekly said holding down prices of fuel causes government budget deficits to explode, making them vulnerable to rising global interest rates.
"Cutting subsidies now would help them prepare for when borrowing gets harder as quantitative easing ends. It would also leave more money for growth-boosting policies, such as infrastructure investment," said the report.Last July, ratings agency Fitch cut its outlook on Malaysia's sovereign debt to negative, citing gloomier prospects for reforms in the wake of the ruling Barisan Nasional coalition's weak election result in May last year.
Putrajaya cut fuel subsidies in September last year, which it asserted could save the government RM1.1 billion, while the electricity tariff went up this month in a move to ward off a possible credit downgrade and reassure investors over the country's fast-growing debt burden.
In shining the spotlight on Malaysia, the publication said the International Monetary Fund (IMF) forecasted that Malaysia's subsidy cuts would push up its inflation rate only slightly, from 2% in 2013 to 2.6% this year.
"While it may put a dent in real wages, slightly higher inflation would chip away at the country’s public debt—and help its government avoid a breach of its statutory debt ceiling of 55% of GDP."
The Economist said whether more countries will follow the lead of Indonesia and Malaysia does not depend only on economics.
"When it comes to cutting subsidies, politics can still trump even the best economic or environmental arguments," it said and cited examples of the New Year's Eve rally in Kuala Lumpur to protest against subsidy cuts and price hikes, as well as in Indonesia where public opinion had placed politicians under pressure to roll back some reforms this year.
The Economist said subsidy cuts can reduce inequality, arguing that the money saved can be spent on targeted cash transfer schemes for the poor and needy, such as Malaysia's aid scheme Bantuan Rakyat 1Malaysia.
Citing IMF research data, the publication said that only 7% fuel subsidies in poor countries go to the bottom 20% of households; 43% end up in the pockets of the richest 20%.
Also citing International Energy Agency estimates, The Economist said the cost of government subsidies for fossil fuels increased from US$311 billion (RM1.02 trillion) in 2009 to US$544 billion (RM1.78 trillion) in 2012. – January 13, 2014.
~ The Malaysian Insider