Fiscal Deficit Marginally Higher Despite More Allocated For Fuel Subsidy -- HLIB

By Nurunnasihah Ahmad Rashid

KUALA LUMPUR, July 15 (Bernama) -- Malaysia is expected to keep its 2026 fiscal deficit broadly on track despite allocating an additional RM25 billion for fuel subsidies, with the deficit to come in at 3.6 per cent of gross domestic product (GDP).

Hong Leong Investment Bank (HLIB) chief economist Felicia Ling said this is only slightly above the government’s original target of 3.5 per cent.

She was speaking at a virtual economic briefing organised by the Institute of Chartered Accountants in England and Wales (ICAEW) Malaysia, here today

Ling said this projected fiscal deficit reflects the government’s ability to accommodate higher subsidy spending through stronger revenue collection, expenditure reprioritisation and dividend income, instead of relying on significantly higher borrowing.

This follows the government’s decision to increase this year’s fuel subsidy allocation by an additional RM25 billion, equivalent to 1.2 per cent of GDP, to maintain the RON95 subsidised petrol price at RM1.99 per litre, she said.

For background, Prime Minister Datuk Seri Anwar Ibrahim had earlier announced an additional RM25 billion allocation, bringing the total fuel subsidy provision for 2026 to RM40 billion to maintain the RON95 subsidised petrol price at RM1.99 per litre.

HLIB expects only a marginal rise because subsidy expenditure falls under operating expenditure, which, by law, must be financed through revenue rather than additional debt, Ling said.

“This means the government will need to either increase revenue or reduce other operating expenditure to accommodate the higher subsidy bill while maintaining fiscal discipline,” she said.

A factor supporting the fiscal outlook is the government’s bond issuance programme, which remains broadly unchanged from its original plan. This indicates there are no signs of substantially higher borrowing requirements despite the additional subsidy spending.

“For the first half of every year, the government should have already issued about 50 per cent to 55 per cent of total government bond issuance. That was the trend we saw in the past few years. This year, we saw that the government has already issued 50 per cent of the total original government bond issuance.

“That indicates that the government is not projecting a higher fiscal deficit, which necessitates it to have a higher bond (issuance),” she added.

HLIB estimates that about RM11 billion of the additional subsidy requirement could be financed through higher government revenue. Another RM5 billion could be from savings in operating expenditure and a further RM5 billion from dividend income, she said.

Ling also said the government has not introduced a special financing mechanism similar to the COVID-19 Fund, which allowed spending outside the annual fiscal framework.

“The absence of a similar mechanism suggests that the government intends to manage the additional subsidy expenditure within the existing fiscal framework while keeping the deficit close to its original target,” she said.

She said the government’s original RM15 billion allocation for fuel subsidies this year was exhausted within the first five months, largely due to higher global oil prices following the West Asia conflict.

-- BERNAMA