PETALING JAYA: Economists are concerned that Malaysia’s fiscal policy could become more constrained should further subsidy rationalisation of RON95 fuel be delayed, derailing the government’s goal of reducing fiscal deficit to 3.5% of gross domestic product (GDP).
The Finance Ministry reported yesterday that the government had spent RM11.2bil subsidising the widely used RON95 petrol up to May, since the rollout of its targeted subsidy approach on Sept 30 last year.
The more notable statistics, however, are that the subsidy bill had just shaded north of 50% of RON95 sales during the period – which were valued at approximately RM22.1bil – while soaring from an expected RM700mil monthly ten-fold to RM7bil since the war in Iran began in late February.
IPP Global Wealth economist Mohd Sedek Jantan told StarBiz that with the fuel subsidy bill potentially reaching RM58.4bil in 2026 from a budgeted RM15bil, a significant portion of the estimated RM25.5bil annual fiscal gains from recent reforms could be absorbed by higher subsidy expenditure.
These reforms included diesel subsidy rationalisation and sales and service tax expansion as well as electricity tariff adjustments.
“The result is a deterioration in fiscal space and a slower pace of deficit reduction.
“Under this scenario, the optimal policy response is unlikely to rely on a single adjustment. Instead, fiscal consolidation would likely be achieved through a combination of stronger revenue mobilisation, expenditure reprioritisation and tighter operating expenditure management,” he predicted.
However, he said a reduction in development expenditure appears less probable, given its relatively high fiscal multiplier and its role in supporting capital accumulation and potential output, which is also consistent with the Public Finance and Fiscal Responsibility Act 2023.
Furthermore, Mohd Sedek warned that while a temporary deviation from the fiscal consolidation path is unlikely to alter Malaysia’s sovereign credit rating, persistent fiscal slippage could weaken fiscal credibility, place pressure on the sovereign credit outlook and gradually increase sovereign financing costs.
“The implication is not necessarily lower growth in the near term, but weaker potential growth if productive public investment is persistently displaced by recurrent subsidy expenditure,” he said.
Meanwhile, with an estimated shortfall of RM43.4bil for the projected year-end subsidy bill to be recovered, which represents 2.1% of GDP, senior Asean economist at HSBC Yun Liu highlighted a Federal Treasury directive that had outlined possible savings of RM10bil across ministries to cut unnecessary spending.
She approximated an additional RM10bil from petroleum windfall revenue to be generated, although she added that it remains unclear where the remaining fiscal gap of RM23.4bil should be sourced.
“One obvious option that stands out is to get more special dividends from Petroliam Nasional Bhd (PETRONAS), if the group is willing and able to match with its 2022 high of contributing RM50bil worth of special dividends.
“Nevertheless, we believe higher crude procurement and logistics costs will also weigh on PETRONAS’ downstream earnings,” she said.
Liu suggested policy options that could be looked at include the removal of targeted subsidies for top earners, although its implementation would require more time; a reduction in the monthly quota from 200 litres; or a theoretical price hike.
Meanwhile, economist and associate professor at Universiti Kuala Lumpur Business School Mohd Harridon Mohamed Suffian stipulated that the revenue streams of the nation should be widened if the further subsidy rationalisation is delayed.
“Foreign companies have to be attracted to invest in projects in Malaysia and this subsequently would be the catalyst for the influx of financial capital.
“If the government is still advocating for the stay of RON95 subsidies, it is then wise to revise the deficit target of 3.5% of GDP.
“Plausibly, it is best to acquire the target through tranches where the targeted value would only be reached within several years,” he said.
He added that on the flip side, government coffers could continue to be strained even if it could translate to more domestic spending among Malaysians.
Chief economist for the Asia Pacific at Coface, Bernard Aw, said that a delay in widening subsidy rationalisation would not immediately undermine investor confidence, but would weaken the credibility of Malaysia’s fiscal reform agenda.
He observed that with investors having given Malaysia credit for diesel reform, tax-base widening, and a stated medium-term path towards lower deficits, markets are currently more concerned about repeated delays than a one-off slippage.
“If fuel subsidies keep absorbing fiscal space, rating agencies may become more cautious, especially because Malaysia’s ratings are currently investment grade.
“Over time, this could put mild upward pressure on borrowing costs. If fiscal reforms continue, however, Malaysia is likely to retain its investment-grade ratings,” said Aw.
Similarly, Mohd Harridon cautioned that with the federal government’s debt already standing at about RM1.3 trillion, with economists projecting that it would continue to grow, continued fuel subsidies would seriously affect the credit standing of the government.
“It is thus imperative for the government to implement a shrewd fiscal strategy to consolidate the fuel subsidy and debt value,” he pointed out.
HSBC’s Liu observed that market sentiment appears to be more forgiving on Malaysia’s fiscal risks than neighbouring countries for now, given Malaysia’s resilient growth outlook; and the role of PETRONAS’ dividends.
Nevertheless, she believes that if fuel subsidy rationalisation is delayed in the face of the energy shock, it needs more proactive communications and credible plans to convince investors why the medium-term fiscal path remains intact.
“Ultimately, the market does not only watch for one-off events, but also for credible plans on execution and implementation,” said Liu.
Mohd Sedek concurred, noting once energy markets stabilise, investors will essentially expect the government to resume subsidy rationalisation and continue implementing structural fiscal reforms.
Maintaining a clear and credible reform trajectory will be more important than adhering to a rigid implementation timeline amid exceptional external conditions, he said.
