Malaysia raised power tariffs by an average of 7.12 percent on Monday to curb a soaring subsidy bill, and although it steered clear of touching petrol prices, analysts said the hike could hurt the government's popularity.

The government gave approval for national power producer Tenaga Nasional to increase rates by as much as 2.23 sen per kwH from June 1, the first hike since 2008 when it raised the tariff by 24 percent.

It also said natural gas prices would rise RM3 per mmBtu every six months until 2016, which ould cut its gas subsidy costs to RM25.64 billion from RM27.22 billion.

However, it said the effect of the power price hike would not be significant.

"The increase in tariff for 75 percent of the population is zero so the subsidy is focused on those who really need it," Economic Planning Minister Nor Mohamed Yakcop said.

Higher inflation imminent

Energy Minister Peter Chin said the impact of the tariff increase on inflation would be minimal. He said inflation should rise 0.27 percentage point, implying average inflation would remain within the government's 2.5-3.5 percent target for the year.

Annual inflation in April was 3.2 percent.

The increase in power and gas prices is part of a plan to cut government subsidies that are expected to double to almost RM21 billion this year and keep the authorities on track to reducing its fiscal deficit to 5.4 percent of GDP in 2011.

The tariff review comes about a week after Prime Minister Najib Abdul Razak's government held off on a fuel price hike.

Higher electricity rates would trigger some increase in the cost of living but the impact is expected to be less than that from a rise in fuel prices.

Be prepared

Subsidies are a key issue for Najib's BN coalition as it contemplates a snap general election possibly later this year, with the rising cost of living exerting growing pressure on the middle- and low-income groups.

Elections however are not due until 2013.

"We'll probably see a slight dip in the government's popularity as the public is already affected by the cost of living," said Ibrahim Suffian, director of Merdeka Centre, an independent opinion polling firm.

"In the early period, it will be small or marginal but it may grow as the cost, say for commercial users, is transferred back to members of the public."

Deputy Prime Minister Muhyiddin Yassin was quoted today as saying consumers should be prepared to pay part of the subsidy cost currently borne by the government, due to high energy prices.

Subsidies had increased from RM10 billion to RM18 billion and could hit RM20 billion, he was quoted as saying by the New Straits Times on Monday.

"It is not an easy issue to handle. Sometimes the people refuse to understand."

PM's mitigating measures

Bank of America Merrill Lynch has warned that unless subsidies are cut, Malaysia's budget deficit could rise to 6.3 percent of GDP in 2011 as the government spends more on fuel subsidies.

Najib has likened Malaysia's fuel subsidies to "opium" but avoided raising prices sharply since taking power in 2009. He has preceded each fuel hike with mitigating measures such as higher wages for low-ranking civil servants.

His predecessor, Abdullah Ahmad Badawi, saw his approval rating plummet from a high of 91 percent to less than 50 percent after doubling the price of gasoline in 2008, according to an

independent survey.

The last review in electricity tariffs occurred in March 2009 when Tenaga cut the rate 3.7 percent on average after a fall in the price of gas, along with other commodities during the financial crisis.

Tenaga's shares were last traded down 0.9 percent at RM6.52 before they were suspended ahead of the tariff hike announcement.

- Reuters

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