Malaysia faces a net fiscal exposure of about RM750 million a year for every US$1 per barrel increase in Brent crude prices, as higher petroleum-related revenue is insufficient to offset the rising cost of fuel subsidies, according to Kenanga Research.
The research house estimated that a US$10 per barrel increase in oil prices could therefore add roughly RM7.5 billion to the government’s annual fiscal burden, highlighting the sensitivity of Malaysia’s finances to movements in global crude prices.
Malaysia is structurally net short oil from a fiscal perspective, with the Ministry of Finance (MoF) estimating that every US$1 per barrel movement in crude prices increases federal petroleum revenue by about RM300 million annually, excluding dividends from Petroliam Nasional Bhd (PETRONAS).
However, Kenanga estimated the subsidy cost beta at around RM1.05 billion a year for every US$1 per barrel, meaning higher petroleum revenue would cover less than one-third of the increase in subsidy costs.
Subsidy exposure remains even without major oil shock
Kenanga said Malaysia’s fiscal exposure to fuel subsidies has a relatively low “strike” level.
Its analysis placed the RON95 subsidy strike at around US$44 per barrel of Brent, while the diesel subsidy strike was estimated at around US$48 per barrel, following the RM2.10 per litre BUDI Diesel price.
Both levels are significantly below Kenanga’s US$80 per barrel average Brent forecast for 2026, suggesting that subsidy-related fiscal exposure would persist even without another major oil price shock.
“The exposure persists even without another major oil shock,” the research house said.
Targeted subsidies have reduced fiscal burden
However, the government’s targeted subsidy reforms have already helped reduce the exposure.
Kenanga estimated that BUDI95 is generating annual savings of between RM2.5 billion and RM4 billion, while BUDI Diesel is expected to generate another RM2 billion in annual savings following its implementation in July.
Combined, the targeted subsidy measures could therefore deliver estimated annual savings of between RM4.5 billion and RM6 billion.
The MoF has previously indicated that the savings generated from subsidy rationalisation could create fiscal space for priorities such as education, healthcare and public transport infrastructure.
Kenanga said the scale of Malaysia’s fuel subsidy exposure makes the reform particularly consequential.
The MoF estimated that combined RON95 and diesel subsidies amounted to around RM3.5 billion a month when Brent crude was trading near US$90 per barrel, comprising approximately RM2 billion for RON95 and RM1.5 billion for diesel.
For 2026, the MoF expects petroleum product subsidies to amount to almost RM40 billion, while Kenanga estimates the figure at between RM38 billion and RM43 billion.
“That single year approaches TENAGA’s entire three-year RP4 capex allowance of RM42.8 billion,” Kenanga said.
Energy diversification seen as long-term solution
Kenanga said the durable solution to Malaysia’s energy-related fiscal exposure lies in rebalancing the country’s energy mix and reducing its vulnerability to imported energy prices.
It said potential solutions differ significantly in terms of capital requirements, where the investment sits on corporate balance sheets, import content and the time required before investments begin contributing economically.
The research house said these factors should be considered when assessing Malaysia’s energy transition rather than focusing solely on the underlying technology.
Rising fuel subsidies could pressure MGS supply
From a fixed-income perspective, Kenanga said fuel subsidies are increasingly becoming a direct input into the government’s fiscal funding requirements.
A sustained increase in unsubsidised pump prices could widen the fiscal deficit before any policy response, making the monthly subsidy trajectory an early indicator of potential Malaysian Government Securities (MGS) supply pressure.
However, the relationship works both ways, it noted.
Administered pump prices can suppress headline inflation, helping to anchor the front end of the yield curve.
Kenanga therefore maintained its 10-year MGS yield forecast at 3.60%.
Energy investment could support ringgit over the longer term
For the ringgit, Kenanga said the longer-term benefit from energy investment would come through a stronger external balance and greater economic complexity as domestic energy capacity expands.
However, the initial phase of investment could have the opposite effect, as the development of new energy infrastructure requires imports of capital goods, creating a near-term drag on the trade balance.
Kenanga maintained its US dollar-ringgit forecast at 3.95 for end-2026.
Overall, the research house’s assessment highlights that while targeted fuel subsidies have reduced Malaysia’s immediate fiscal exposure, the government’s finances remain highly sensitive to global oil prices, reinforcing the need for longer-term measures to diversify the country’s energy exposure and reduce dependence on fuel subsidies.
