PETALING JAYA: A potentially higher subsidy bill due to the recent rise in Brent crude oil prices can likely make it more difficult for Malaysia to achieve its fiscal consolidation targets.
This includes a potentially more challenging task towards attaining the government’s fiscal deficit target of 3.5% of gross domestic product (GDP) this year.
Sunway University economics professor Yeah Kim Leng said a prolonged period of crude oil prices exceeding US$100 per barrel would require the government to revise the oil-price assumption used in preparing Budget 2027. Budget 2027 is scheduled to be tabled next month on Oct 9.
“Given the uncertainty over the Middle East situation, especially the ongoing re-escalation of bombings and targeting of oil tankers and facilities in the region, an upward revision of the oil-price assumption to US$80 to US$90 per barrel would likely be considered for Budget 2027,” he told StarBiz. If that materialises,
Yeah said the allocation for fuel subsidies would have to increase substantially under such circumstances.
“The subsidy bill for 2026 could rise above RM40bil if crude oil remained above US$100 per barrel, compared with the RM15bil initially allocated under Budget 2026,” he said.
However, the effect would be partly cushioned by Malaysia’s position as a net energy exporter, as Yeah estimated the government is to collect about RM3bil in additional revenue for every US$10 increase in Brent crude prices.
Brent crude oil last traded at US$101.32 per barrel on the spot markets.
“Nonetheless, higher subsidy spending would challenge Malaysia’s fiscal consolidation targets, making it harder to achieve the 3.5% target this year,” he said.
“A one-off deviation arising from an unusually large external shock, however, is not concerning for foreign investors and sovereign credit agencies as long as the government remains committed to its fiscal consolidation trajectory,” Yeah added.
He expects persistently high energy prices to produce mixed effects across the Malaysian corporate sector.
“The transportation, logistics, aviation, manufacturing, construction and small and medium enterprise sectors would come under significant pressure as higher fuel and input costs compress margins and, coupled with limited pricing power, full cost absorption would be difficult,” he said.
In contrast, oil and gas producers and companies involved in energy-related infrastructure could benefit from elevated energy prices.
Yeah cautioned that the inflationary effects would still be significant despite the fuel subsidies available to consumers and businesses.
“Elevated energy costs are expected to push consumer price inflation above 2.5% and producer price inflation could rise above 10% if crude oil prices remain above US$100 per barrel for a prolonged period,” Yeah noted.
“Consumer spending may moderate as households allocate more income to essentials, while businesses may spend less due to weakening demand,” he said.
Nevertheless, Yeah said the economy had demonstrated resilience since the start of the global energy shock, supported by Malaysia’s net energy exporter status, reduced dependence on petroleum revenue, strong banking system and targeted subsidy mechanisms such as Budi95 and Budi Diesel.
“However, if the conflict persists at the current intensity for six months or more, Malaysia could face persistent inflation, renewed cost-of-living pressures, cautious private investment and slower global growth affecting exports, with GDP growth potentially moderating to the lower end of the baseline projection of 4.5% to 5%,” he cautioned.
Meanwhile, OCBC Research said oil was the principal driver of financial markets overnight, with Brent crude rising above US$100 per barrel as escalating attacks involving the United States and Iran, together with renewed strikes on Saudi Arabia’s energy infrastructure, heightened fears of further disruptions to Middle Eastern supply.
“Flows through the Strait of Hormuz remain below pre-war norms, while uncertainty around actual volumes and continued shipping disruptions are keeping physical markets tight and supporting a geopolitical risk premium in oil prices,” it said.
The oil-price increase weighed modestly on equities and revived concerns over inflation, while the yield on 10-year US Treasury securities approached 4.84%.
Gold also rose amid renewed geopolitical uncertainty, although the broader US dollar remained comparatively subdued as the yen’s strength continued to weigh on the US Dollar Index.
“Near term, oil is likely to remain an important cross-asset driver. A sustained move above US$100 would reinforce inflation and interest-rate risks and could become a larger headwind for oil-importing Asian economies excluding Japan,” OCBC Research said.
Conversely, signs of shipping flows returning to normal would ease some of the pressure on the wider investment environment, it added.
Commenting further, managing partner at SPI Asset Management Stephen Innes said in his macro note that crude oil’s rise above US$101 per barrel had significantly changed the outlook for inflation and interest rates.
“Brent above US$101 per barrel changes the inflation conversation. The longer crude and product prices stay elevated, the harder it becomes for markets to treat the shock as temporary,” he said.
Although crude oil continued to move through pipelines, Innes said conditions in the refined-products market presented a particularly serious inflationary threat.
“Diesel and other product cracks remain exceptionally elevated, inventories are thin, and continued Ukrainian attacks on Russian refining capacity are adding another layer of stress to an already tight product market,” he said.
This was important because consumers and businesses would feel the shock through diesel, freight and transportation costs, irrespective of movements in crude oil futures.
“If crude stays high and product markets remain this tight, the inflation impulse becomes much harder to dismiss as something that will simply wash through the system,” Innes said.
He noted that the geopolitical premium in oil prices was no longer being imposed on an otherwise comfortable supply situation, as physical crude prices and refined products were already signalling scarcity.
Shipping traffic through the Strait of Hormuz had fallen sharply, while attacks on vessels risked undermining ship-to-ship transfers in the Gulf of Oman, one of the alternative channels that had allowed oil to continue reaching international buyers.
“Brent has crossed US$100 per barrel because the market is no longer pricing a short interruption followed by a diplomatic reset. It is pricing the possibility that fewer vessels will sail, insurance will remain expensive, and the improvised channels keeping Gulf barrels moving will begin to fail,” Innes said.
He added that markets would continue to focus on actual shipping volumes rather than diplomatic assurances.
“Until ships begin moving through Hormuz in something approaching normal numbers, the oil market will trust the traffic data more than the political promises,” he said.
