Subsidies on oil products are likely to remain in place in most of the Asian countries, keeping inflationary pressures moderate and providing room for central banks to cut interest rates later in the year, Capital Economics Asia Economist Gareth Leather said in a note Monday.
According to Leather, though the recent spike in oil prices has put budgets of Asian countries that operate fuel subsidy regimes under strain, political and economic factors prevent governments from implementing reforms in the subsidy system.
The economist observed that hiking fuel prices substantially may lead to widespread protests, putting governments in the region in trouble, most of which heavily subsidize the price of oil. Thailand and Indonesia have the most costly fuel subsidy regimes, while Indonesian spends more on fuel subsidies than on health and education combined.
As an exception, the Sri Lankan government pushed through fuel prices hikes of 8-30 percent February. No other country has been prepared to follow Sri Lanka's lead as healthy fiscal positions in most countries means there is no urgent need for reform. The spike in inflation that normally follows fuel price hikes also makes governments refrain from cutting subsidies.
Though the Indonesian government had plans to hike fuel prices by 33 percent, it had to abandon it following strong opposition from within the ruling coalition. Fuel prices in Indonesia are likely to remain the lowest in Asia. Malaysia is also unlikely to reduce its oil subsidies since higher dividends from Petronas, the state-owned oil company, mean higher oil prices are good for government finances.
by RTT Staff Writer
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