Tenaga Nasional, Malaysia's national electricity company, won government approval on Wednesday (May 24) to hike its electricity prices - by an average of 12% as of June 1 - due to the rising price of fuel.
In February, Prime Minister Abdullah Ahmad Badawi increased fuel prices, and planned an increase electricity bills. Just like in Indonesia, this had the ripple effect of triggering street protests.
“The government’s caution reflects the unpopularity of the March fuel price hike, which probably contributed to the losses suffered by the ruling UMNO party in the Sarawak state assembly elections over the weekend,” says ING analyst Tim Condon.
But with those elections over, now is the time to up the price, which to be fair, is long overdue – the last electricity rate rise was an 8.3% increase in 1997. And the latest measures do try to ease the burden on the poor. The first 200 kilowatt hours, or M$43.60 ringgit ($12) on each monthly bill, are exempted from the hike. That means about 59% of the nation’s households could see their electricity bill stay the same. However, it won’t spare corporates who sizzle through electricity and are sure to pass along their costs to consumers.
That means the likelihood of rising inflation is in the cards. The nation’s inflation rate hit a seven-year high of 4.8% in March thanks to the hike in fuel prices a month earlier. Interestingly though, Malaysia's central bank didn't raise rates on Monday (May 22) after three increases since November kept inflation from accelerating further in April. The pause surprised most analysts; but to be fair, the overnight policy rate of 3.5% is the highest since the benchmark was introduced in 2004.
And while inflation may be a worry, the increase will help the utility, which supplies two-thirds of the country's power and has a distribution monopoly, pay its M$28.9 billion ($7.9 billion) and enable it to expand output and build new power plants.
On Thursday (May 25), Macquarie analysts reiterated their "outperform recommendation" and raised their forecast on Tenaga Nasional given that the approval tariff increase did not come with a corresponding gas price increase as well.
Nonetheless, most analysts say the market has already taken into account an inevitable rise in electricity tariffs – that’s why Tenaga's shares have risen more than 7% this year.