KUALA LUMPUR, March 30 — 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, said 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 state election 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 (RM400) per barrel, significantly increasing the country’s subsidy burden.

At the time of writing, Brent crude jumped 2.16 per cent to US$115 per barrel as Iran-backed Houthi militants in Yemen entered the conflict in West Asia.

Recently, the Ministry of Finance said the government is bearing petrol and diesel subsidies estimated at up to RM4 billion a month under the implementation of 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 would 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 noted that 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 the Fed to lower the Fed Funds Rate by 50 basis points to a terminal rate of 3.25 per cent. However, the ongoing US-Iran conflict suggests that the timing of these cuts would probably be delayed until the second half of 2026,” she added. 

Overnight policy rate

BMI is of the view that Bank Negara Malaysia (BNM) was not under immense pressure to adjust its overnight policy rate settings, which currently stood at 2.75 per cent, though it could act earlier in the event of a sharp slowdown in global and domestic growth.

Wong said that a downside scenario where oil prices were sustained at the US$150 per barrel level, prompting headline inflation to spike above the government’s upper bound target of 1.3-2.0 per cent 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 have opted to keep the price of RON95 unchanged at RM1.99 per litre 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 point for every 10 per cent increase in oil prices, some way lower than its regional peers, including Thailand and Philippines.

MARC Ratings Bhd chief economist Dr Ray Choy said Malaysia’s sovereign credit rating remains resilient to marginal fiscal changes, adding that a slight increase in the fiscal deficit-to-GDP ratio beyond 4.0 per cent, for instance due to higher subsidies, is unlikely to affect the country’s rating or outlook as it remains within historical norms during periods of economic challenges.  

He added that Malaysia’s fiscal deficit should remain well contained, supported by the scope to streamline operating expenses and adjust contributions from government-related entities, including Petronas. 

“Higher tax revenues from increased profits in the hydrocarbons sector will likely provide a buffer to the fiscal position. Furthermore, the current geopolitical situation is expected to be temporary, and credit ratings adopt a through-the-cycle approach, implying that any downdraft due to the war in the Middle East will likely be mirrored by a subsequent rebound,” he told Bernama. 

MARC Ratings said there was a downside risk of 0.2 to 0.4 per cent to its baseline growth forecast of 4.6 per cent due to the war, while logistics and global supply chains may lengthen due to rerouting, but are unlikely to halt completely. 

Choy said Malaysia has several ports to accommodate increased supply chain demands, and neighbouring ports also retain some spare capacity to cope with higher container handling requirements.  However, tighter port capacity and supply chain dislocations are expected to lead to higher costs, he added. 

Choy said Malaysia’s GDP growth rate is expected to remain close to its long-term average despite the war, hence there was little need to cut interest rates.  “However, should the war worsen in both duration and scope, leading to GDP growth falling closer towards 4.0 per cent or lower, an interest rate cut would likely be warranted,” he added. — Bernama