Juwai IQI global chief economist Shan Saeed.
PETALING JAYA: The current low crude oil price, due to the oversupply in the global energy market, will not derail Malaysia’s fiscal deficit target for 2026 and beyond, economists say.
They attributed this to the government’s reduced dependence on petroleum-related revenues and the diversification of revenue streams over the years due to the commodity’s price volatility.
As such, measures have been taken to cushion the impact.
The government has pegged its projection for Brent crude at between US$60 and US$65 a barrel for 2026.
At the time of writing, Brent crude, the international benchmark for oil, was up by 0.9% to about US$65.
Malaysia aims to reduce its fiscal deficit from 3.8% of gross domestic product (GDP) in 2025 to 3.5% of GDP in 2026, reflecting the government’s strong commitment to fiscal consolidation under the 13th Malaysia Plan (13MP) and the Fiscal Responsibility Act, with medium-term goals of bringing it below 3% by 2028 by controlling spending and enhancing revenue.
Juwai IQI global chief economist Shan Saeed told StarBiz that the prevailing oil price regime now functions as a macroeconomic backdrop for Malaysia, rather than a fiscal determinant.
“Even within a US$65 to US$87 per barrel environment, the country’s fiscal position remains resilient, reflecting a decade of deliberate policy recalibration, institutional strengthening, strong balance sheet and improved fiscal governance,” he said.
He added that oil-related revenues today account for a materially smaller share of total government receipts than in earlier cycles, significantly reducing exposure to commodity price volatility.
“Malaysia’s fiscal deficit trajectory for 2026 continues to be assessed by international forecasters as manageable and policy-anchored, with government debt ratios stabilising within credible medium-term bounds.
“As a result, Malaysia’s fiscal performance is no longer contingent on favourable energy cycles.
“It is increasingly anchored in policy discipline, reform continuity, sovereign macroeconomic fundamentals and prudent macroeconomic management – a structural shift recognised by both domestic financial institutions and international rating agencies,” Shan said.
HSBC Asean economist Yun Liu
HSBC Asean economist Yun Liu said that despite being a net energy exporter, Malaysia has been diversifying its revenue away from energy.
She said the share of oil and gas revenue has dropped from its peak of almost 30% in 2019 to only around 12% in Budget 2026, noting that this aims to shield government coffers from volatility in oil and gas prices.
For 2026, Liu said the government is likely to rely on the decent gross domestic product (GDP) growth and broadening the tax base via improving tax compliance.
OCBC Senior Asean economist Lavanya Venkateswaran
OCBC senior Asean economist Lavanya Venkateswaran said that, on balance, she expects lower oil prices to reduce fiscal deficit pressures in 2026.
“While lower global oil prices will negatively impact oil-related revenues, which are budgeted to account for 12.5% of total revenues in 2026, they will also help to reduce the subsidy bill.
“The introduction of a tiered RON95 pricing system allows the government to benefit from higher fiscal savings. The extent of these savings depends on how low oil prices will drop below the budgeted US$60 to US$65 a barrel for this year,” Lavanya noted.
Sharing similar views, MARC Ratings Bhd chief economist Ray Choy said Malaysia’s fiscal reliance on oil has declined structurally.
He said such revenues are estimated to account for 12.5% of total government revenue in 2026, significantly lower than 31.7% in 2019, reducing Malaysia’s exposure to oil price volatility.
He added that lower fuel prices would ease subsidy outlays, partially offsetting revenue weakness.
MARC Ratings Bhd chief economist Ray Choy
“Ultimately, fiscal outcomes will hinge more on policy execution than commodity prices.
“Continued progress in tax administration reforms, such as e-invoicing and digital tax enforcement initiatives, alongside sustained fiscal discipline, will support the achievement of the targeted fiscal deficit,” Choy said.
RAM Rating Services Bhd economist Nadia Mazlan
RAM Rating Services Bhd economist Nadia Mazlan said Malaysia’s revenue is now much more diversified and notably less sensitive to oil price fluctuations than in the past, although its contribution is still considered discernible.
“The nation’s oil and gas-related revenues, excluding dividends, accounted for an average of 8.9% of revenue during 2021 to 2025, a marked reduction from 9.5% during 2016 to 2020 and 17.1% of revenue from 2011 to 2015.
“This dampens the impact that a decline in oil price would have on overall fiscal revenue,” she said.
Nadia added that the government’s continued commitment to fiscal consolidation could help prevent the fiscal deficit from ballooning, with tighter spending controls expected to be enforced, as indicated in its medium-term fiscal framework.
“The reduction in expenditure would further be complemented by efforts to enhance revenue collection and reduce leakages, which should provide support in achieving an improved fiscal balance.
“We project the fiscal deficit will ease to around 3.5% of GDP in 2026, following an estimated 3.8% in 2025,” Nadia said.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid is optimistic that the government’s fiscal deficit target of 3.5% for 2026 is attainable.
The share of petroleum-related revenue’s contribution to the government’s total revenue has declined over the years.
He said in 2010, the share was 35.4% and dropped to 19.3% in 2024. Based on Budget 2026, the ratio is expected to fall further to about 12.5% in 2026, he added.
On that note, Mohd Afzanizam said the government has been cognisant of potential challenges arising from volatility in crude oil prices and has taken measures to avoid over-dependence on oil as a source of revenue.
HSBC chief economist for Australia, New Zealand and global commodities Paul Bloxham
On a broader outlook of the oil market, HSBC’s chief economist for Australia, New Zealand and global commodities Paul Bloxham sees the global oil market moving into a surplus in 2026, which would put downward pressure on oil prices.
He noted that the Organisation of the Petroleum Exporting Countries and its allies (Opec+) have added back almost three million barrels a day of the six million barrels that were being withheld from the global market 12 months ago.
“A further release of barrels onto the market is expected through 2026,” he said. “At the same time, geopolitical risks – particularly around Iran and Venezuela – have created volatility in oil markets amid an overall declining trend in oil prices.”
“We expect geopolitical and trade policy risk to continue to be in focus in 2026, and we expect the Brent oil price to average US$65 a barrel in 2026, down from its US$68.20 average in 2025,” Bloxham said.
OCBC commodity strategist Sim Moh Siong.
OCBC commodity strategist Sim Moh Siong said geopolitical risks such as the United States’ move on Venezuela and tensions in Iran have pushed up oil prices.
However, he said rising output outside Opec and Opec+’s capacity to ramp up supply as needed should limit the risk of a sustained oil price spike.
“We expect the oil price outlook to remain subdued and maintain our forecast for Brent to stay subdued, but to bottom near US$59 per barrel by year-end, pending clarity on Venezuela’s new government and resource policy.
“Venezuela oil reserves are big on paper, but it is unclear how quickly its political changes will bring enough stability to attract private investors to fix the country’s dilapidated oil infrastructure. Opec’s pause in quota hikes supports a soft floor for Brent in the high US$50s,” Sim said.
