VZCZCXRO2872
RR RUEHBC RUEHCHI RUEHDA RUEHDE RUEHDT RUEHGI RUEHHM RUEHJS RUEHKUK
RUEHLH RUEHNH RUEHPW RUEHROV
DE RUEHKL #0476/01 1580927
ZNR UUUUU ZZH
R 060927Z JUN 08
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 1101
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHGV/USMISSION GENEVA 1580
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCNISL/ISLAMIC COLLECTIVE

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 000476 
 
STATE PASS USTR - WEISEL AND BELL 
STATE PASS FEDERAL RESERVE AND EXIMBANK 
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN 
SINGAPORE PASS TO SBAKER 
USDOC FOR 4430/MAC/EAP/M.HOGGE 
TREASURY FOR OASIA AND IRS 
GENEVA FOR USTR 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG SENV ECON EFIN EINV ETRD PGOV MY
SUBJECT: MALAYSIA RAISES GASOLINE PRICE OVERNIGHT BY 40 PERCENT, 
DIESEL BY 63 PERCENT 
 
REF: KUALA LUMPUR 398 
 
¶1.  SUMMARY:  In an effort to address rising costs of energy 
subsidies, Prime Minister Abdullah Badawi yesterday announced a 40 
percent price increase on gasoline, a 60 percent price increase on 
diesel, and 20 to 26 percent increases in electricity rates, 
effective at midnight on June 4. The new price brings Malaysian 
prices to USD 0.83 per liter, higher than Indonesia's price at USD 
0.64 but still significantly lower than Singapore's USD 1.60 per 
liter.  A further increase could be announced in August.  Higher 
prices for electricity will go into effect on July 1.  The 
announcement of an increase was not unexpected; however, many people 
were surprised that the increase was so large and so sudden. 
Political opposition leaders are considering protest actions.  END 
SUMMARY. 
 
PUMP PRICES RISE IMMEDIATELY 
---------------------------- 
 
¶2. At 5:30 p.m. on June 4, the Prime Minister announced a 40 percent 
increase in the price of gasoline, from RM 1.92 to RM 2.70 per 
liter, and a 63 percent increase in the price of diesel to RM 2.58 
per liter, effective at midnight on June 4.  To help offset the 
large increase for consumers, owners of vehicles with engines less 
than 2000 cc will be eligible for a RM 625 rebate when they renew 
their annual road tax; owners of motorcycles less than 250 cc will 
receive a RM 150 rebate. 
 
ELECTRICITY RATES TO RISE JULY 1 
-------------------------------- 
 
¶3.  The PM also announced rate increases for electricity effective 
July 1.  Rates will increase progressively based on usage, ranging 
from 18 to  26 percent for commercial and industrial users and from 
one to ten percent for households using more than 200 KW per month. 
According to the national power company Tenaga, approximately 40 
percent of households will be affected by the price increase.  In 
Malaysia, 68 percent of electricity generation comes from natural 
gas.  Independent power producers (IPPs) have fixed-price contracts 
to purchase natural gas from Petronas, the national oil company, at 
RM 14.31 per Btu; current market rates are closer to RM 35. Most of 
these contracts are effective until 2015 or 2016.  Although IPPs are 
subject to the Windfall Profit Levy Act of 1998, critics such as 
Jeff Ooi, a local blogger who was elected to Parliament on an 
opposition ticket on March 8, claim that the tax will not begin to 
address the huge benefits that will accrue to the IPPs as a result 
of the rate hike.  "Subsidies distort the economy and should go.  Do 
something?  Remove the obscene subsidies to the IPPs so that all are 
treated equally," writes Ooi in his blog. 
 
PROTESTS LIKELY 
--------------- 
 
¶4.  However, so far much of the focus has been on the rising price 
of gasoline, not electricity.  "Inshallah (God willing), I hope they 
will not demonstrate over this," said the PM, referring to 
demonstrations that took place in 2006 when the GOM raised the price 
of gas by 30 sen per liter. But opposition (PAS) parliamentarian 
Mohamed Hatta Ramli, who led anti-inflation demonstrations earlier 
this year, says to expect protests, calling the move a "severe 
misjudgment on the part of government" and saying it will "create 
big problems for all and sundry." 
 
SAVINGS CHANNELED TOWARD FOOD 
----------------------------- 
 
¶5.  The savings from the government's subsidy bill will be channeled 
into the GOM's "food security policy," according to the Prime 
Minister.  He assured the public that Malaysian GDP likely would 
still grow by 5 percent this year, and inflation also would increase 
by only 5 percent in 2008 - though that is two percentage points 
higher than the rate measured in April. The PM left the door open 
for further price adjustments by August, including a possible move 
to full market prices.  "We are moving towards a market price regime 
but it has to be step by step; we cannot do it immediately," he 
said.  The PM explained that the GOM would continue to offer a fixed 
RM 0.30 (30 sen) subsidy per liter on gasoline, with the pump price 
 
KUALA LUMP 00000476  002 OF 002 
 
 
adjusted to 30 sen below the market rate as determined on a monthly 
basis.  However, it was unclear whether this would be the policy 
over the next two months or when market prices would be implemented 
across the board, or whether the GOM would continue the 30 sen 
subsidy indefinitely. 
 
TIMING WAS KEY 
-------------- 
 
¶6.  (SBU) Eddy Chuah, President of ePetrol Systems Ltd., a 
technology company that developed a system to manage subsidies 
through the use of the chip-embedded ID card that every Malaysian 
citizen is required to carry, told Econoff that the company 
presented its system to a special "Subsidy Committee" made up of 
professionals from the Ministries of Finance and Domestic Trade. 
Although the Committee seemed very interested, Chuah believes the 
reason they ultimately rejected it was that it would take four to 
six months to implement, and the GOM needed something immediate. 
While Chuah still hopes his company can provide the GOM with a 
system to distribute rebates to income-eligible Malaysian citizens 
to help compensate for lost subsidies, he now is focusing on 
Indonesia and China where subsidy management remains a problem. 
 
SALE TO NON-MALAYSIANS BACK ON 
------------------------------ 
 
¶7.  (SBU) All talk of banning the sale of gasoline within 50 
kilometers of Malaysia's land borders has been dropped with the new 
price increase.  Chuah claims the June 2 implementation of such a 
ban at the Thai border was putting additional pressure on the GOM to 
find a quick solution.  Thailand was planning to retaliate with a 
100 kilometer ban on selling fuel to drivers of Malaysian-registered 
vehicles on its own side of the border.  The Thais complained that 
they were being singled out since the planned ban near the Singapore 
border had been "delayed." Gas station owners near the Thai border 
complained that they were losing business.  One told the press that 
90 percent of his customers were foreigners.  Even at the new price, 
Malaysian gasoline is still cheaper than in Thailand and especially 
Singapore where it sells for USD 1.60 per liter. 
 
¶8.  COMMENT:  (U) Current trends of shrinking Malaysian production 
and increasing domestic demand project that by 2011 or 2012 Malaysia 
will become a net importer of oil (reftel).  The increased price 
might have some minor impact on demand, and also might encourage 
more vehicles to switch to natural gas. However, Malaysia over the 
years has invested much more heavily in road construction than in 
public transportation infrastructure and most people depend on 
private automobiles. Unfortunately there is no talk so far of using 
the savings from reduced fuel subsidies to improve public 
transportation. 
 
¶9. COMMENT (CONT'D): (U) Faced with a huge subsidy bill and 
shrinking oil reserves of its own, a move to reduce fuel subsidies 
was inevitable, and most Malaysians realized this.  However, such a 
sharp increase did come as a surprise to the public in a country 
where the government seldom does anything in a hurry.  This is an 
uncharacteristically bold and risky move for Abdullah, who continues 
to face serious pressure to resign from within his own UMNO party 
following the March 8 election setback.  The Prime Minister likely 
is acting in good faith to implement subsidy reductions he knows are 
necessary but are extraordinarily difficult even under ordinary 
circumstances. 
 
KEITH