Malaysia cuts subsidies on fuel

Subsidies on fuel are a key contributor to Malaysia's budget deficit

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Malaysia has cut fuel subsidies for the first time in more than two years as it tries to cut its budget deficit.

The subsidy on petrol has been cut by 20 sen (6 cents; 4 pence) a litre and on diesel by 20 to 80 sen a litre.

Prime Minister Najib Razak said the cuts would result in savings of about 3.3bn ringgit ($1bn; £650m) a year.

The government spent 24bn ringgit on fuel subsidies last year, which contributed to a widening budget deficit.

Malaysia's budget deficit, which is the amount the government spent above the amount it raised, was 4.5% of its gross domestic product (GDP) last year.

Ratings agency Fitch cited the high budget deficit as one of the factors that led it to lower the outlook on Malaysia's credit rating to negative from stable in late August.

"It's a process of fiscal consolidation," Mr Najib said. "The market will feel more confident if we can bring down our fiscal deficit."

'Defending the ringgit'

The change also comes at a time when Asia's emerging economies have been hit by an investor pull- out.

The pull-out has been triggered by speculation that the US central bank will soon begin to cut back on the amount of money it is pumping into the economy.

That has hurt currencies and stocks in these countries, including Malaysia, which has seen its currency, the ringgit, decline nearly 10% against the US dollar since May.

Some analysts said that the cut in fuel subsidies was an attempt by the government to boost investor confidence to ensure that they don't pull out of the country.

"The fact the announcement was made just weeks before the annual budget shows that one of the objectives is to defend the ringgit," said Song Seng Wun of CIMB Research.

"They want to contain it from sliding further." -BBC News