KUALA LUMPUR: Malaysia remains well-positioned to withstand rising fiscal pressures as the price of Brent crude holds above US$100 per barrel, with stronger petroleum-related revenues expected to cushion the impact of a higher RON95 subsidy bill, according to analysts.
BMI senior country risk analyst Caroline Wong said higher oil prices would significantly increase the subsidy burden, but elevated crude prices would also lift government revenues, allowing the government to remain broadly on track with its fiscal consolidation plans.
She added that the government is expected to continue advancing reforms, particularly ahead of upcoming state and national elections following the Sabah polls in November 2025.
“Indeed, Malaysia is not immune to the broader risk-off sentiment despite it being a net energy exporter.
“Even so, we believe that geopolitical uncertainty and the ringgit’s positive correlation with oil prices are not the only factors influencing the unit’s performance.
“In the short term, we believe the ringgit’s trajectory will hinge on policymakers’ ability to keep inflation contained while ensuring the sustainability of the RON95 subsidy bill.
“This is because the shield that the fuel subsidies provide is crucial in anchoring inflation expectations,” Wong told Bernama.
The prolonged conflict in West Asia has exerted pressure on global energy markets, with crude oil prices now exceeding US$100 per barrel, significantly increasing the country’s subsidy burden.
At the time of writing, Brent crude jumped 2.16% to US$115 per barrel as Iran-backed Houthi militants in Yemen entered the conflict in West Asia.
Recently, the Finance Ministry said the government is bearing petrol and diesel subsidies estimated at up to RM4bil a month under the implementation of the Budi95 and Budi Diesel programmes, following the rise in global crude oil prices.
To cushion the impact, Prime Minister Datuk Seri Anwar Ibrahim announced that Malaysia will reduce the monthly Budi95 allocation for individuals to 200 litres, effective April 1, to mitigate rising oil prices driven by the West Asia conflict.
The price of the subsidised petrol initiative will remain unchanged at RM1.99 per litre.
Wong said while the increase in petroleum-related revenues could trigger a tailwind, the ringgit remains susceptible as market participants pare back the US Federal Reserve’s (Fed) rate-cut expectations.
“For now, our Americas team continues to expect it to lower the Fed funds rate by 50 basis points to a terminal rate of 3.25%.
“However, the ongoing US-Iran conflict suggests that the timing of these cuts would probably be delayed until the second half of financial year 2026,” she added.
BMI opined that Bank Negara Malaysia (BNM) is not under immense pressure to adjust its overnight policy rate settings, which currently stand at 2.75%, though it could act earlier in the event of a sharp slowdown in global and domestic growth.
Wong said a downside scenario where oil prices are sustained at the US$150 per barrel level, prompting headline inflation to spike above the government’s upper bound target of 1.3% to 2% this year, would lead BNM to act sooner rather than later.
“But as things stand, we believe the chances of such a scenario materialising are low.
“For one, the government’s fuel subsidies will act as the primary shock absorber. Policymakers opted to keep the price of RON95 unchanged and instead bear the brunt of a fourfold increase in the monthly subsidy bill,” she noted.
Wong said BMI’s estimates suggested that even accounting for second-round effects, Malaysia’s headline inflation would rise by 0.13 percentage points for every 10% increase in oil prices, way lower than its regional peers, including Thailand and the Philippines.
Meanwhile, MARC Ratings Bhd chief economist Dr Ray Choy said Malaysia’s sovereign credit rating remains resilient to marginal fiscal changes.
He added that a slight increase in the fiscal deficit-to-gross domestic product (GDP) ratio beyond 4% – due to higher subsidies, for instance – is unlikely to affect the country’s rating or outlook, as it remains within historical norms during periods of economic challenges.
Choy said Malaysia’s fiscal deficit should remain well contained, supported by the scope to streamline operating expenses and adjust contributions from government-related entities, including Petroliam Nasional Bhd.
“Higher tax revenues from increased profits in the hydrocarbons sector will likely provide a buffer to the fiscal position.”
Choy said Malaysia’s GDP growth rate is expected to remain close to its long-term average despite the war, so there is little need to cut interest rates. — Bernama
