KUALA LUMPUR, May 21 (Reuters) - Malaysia's government is to meet next week in a bid to slash subsidy spending that has more than doubled since 2006 and last year helped push the country to its biggest budget deficit in over 20 years.
The government of Prime Minister Najib Razak has promised to cut subsidies that cover a wide range of goods from petrol to electricity and cooking oil – key staples in this developing Southeast Asian country — but has backed down, fearing a backlash from voters.
According to official government figures, subsidy spending rose to 24.5 billion Malaysian ringgit ($7.49 billion) in 2009, 15.3 percent of total federal government spending, more than double the 10.1 billion it spent in 2006.
In a bid to push reform through and to win public support, Najib put former Malaysian Airlines Chief Executive Idris Jala in charge of a thinktank to come up with a comprehensive set of reforms.
"Some of the proposals by Idris Jala on rationalising the subsidies will be presented to cabinet on May 26," said a government source with direct knowledge of the matter.
"The next day, there will be a forum open to the public to discuss these subsidy proposals. All the cabinet ministers have been invited for this as well," he said.
It was not immediately clear which of the proposals from Idris’ wide-ranging review will be discussed and investors are likely to wait for the proposals to be implemented before giving a vote of confidence in Malaysian assets.
"I think they have disappointed markets a few times already this year, so people will be a bit more cautious in reaction to this," said Alvin Liew, regional economist at Standard Chartered in Singapore.
Malaysian 5-year government bond yields were unchanged at 3.532 percent by 0515 GMT and the ringgit currency was trading at 3.32 to the dollar, slightly better than two month lows it hit on Wednesday.
DEVIL IS IN THE DETAIL
The proposals from Idris’ thinktank have not been made public and the government is reeling from a surprise by-election loss in Sarawak state last weekend.
It faces state elections in Sarawak this year and petrol price hikes ahead of the last state elections in the state on Borneo Island allowed the opposition to boost its presence in the state that accounts for around a fifth of all government MPs.
Najib has pledged major economic reforms to boost growth and increase investment in Malaysia, which once led emerging Southeast Asia in investment flows but has now lost ground to Thailand and Indonesia.
His National Front coalition is still struggling to come to terms with its worst ever showing in national and state elections in 2008 when it lost its iron clad two-thirds parliamentary majority.
Najib, an urbane 56-year old British educated economist, faces an uphill struggle to implement economic and political reforms in the government that has ruled Malaysia for 52 years.
There are signs emerging of a backlash to reforms from Malays, who represent 55 percent of Malaysia’s 28 million population and who form the backbone of support for the government.
A group called Perkasa has been set up to oppose changes to Malaysia’s four decades old race-based economic system that was supposed to help Malays catch up with richer ethnic Chinese, but which critics say has hurt growth and engendered graft.
"Now will be just to test the water and see the public reaction," said James Chin, Professor of politics at the Monash University campus in Kuala Lumpur.
"They will not cut subsidies for the more "essential" items such as sugar or rice. The cuts will be for items that affect the least number of people," he said.
