KUALA LUMPUR (July 15): Hong Leong Investment Bank (HLIB) expects Malaysia’s fiscal deficit to widen only marginally to 3.6% of gross domestic product (GDP) this year from the government’s 3.5% target, despite an additional RM25 billion in fuel subsidy spending.
HLIB chief economist Felicia Ling said the higher fuel subsidy bill would be largely offset by stronger economic growth, higher crude oil prices, which would boost petroleum-related revenue and dividend income, as well as operating expenditure savings.
She was speaking during an Institute of Chartered Accountants in England and Wales (ICAEW) Malaysia webinar on Wednesday (July 15).
The investment bank has raised Malaysia’s 2026 GDP growth forecast to 4.7% from 4.5%, supported by stronger manufacturing activity, rising AI-related semiconductor exports, steady domestic demand and continued construction investment, especially in data centres.
The revised projection remains within the government’s official 2026 GDP growth forecast of 4% to 5%.
Ling said HLIB does not expect the government to issue more bonds to cover the higher fuel subsidy costs, allowing the fiscal target to remain on track.
The additional RM25 billion in subsidy spending will be funded through spending cuts, higher government revenue and increased dividend income, she said.
The government’s fuel subsidy allocation has increased to RM40 billion from the RM15 billion budgeted for 2026, due to higher global oil prices that pushed up subsidy spending in March and May.
Fuel subsidy spending rose sharply, reaching RM4.7 billion in March, RM4.9 billion in April and RM4 billion in May, compared with just RM800 million each in January and February.
Ling attributed the stronger revenue outlook to faster economic growth and higher crude oil prices than initially assumed under Budget 2026.
“The revenue is going to be higher because last year when the government first started doing their budget, the budget was predicated upon the assumption that GDP will grow by 4.1% this year. Right now, we are projecting Malaysia’s growth to be stronger than that — we are looking at 4.7%. So higher GDP growth would increase the revenue collection for the government.
“The second reason is also oil prices. So when the government first did their budget, they assumed that the oil price would average at about US$60 to $65 [per barrel] and right now the average oil price is at over US$80 dollars. So with higher oil revenue, that gives higher royalty and also higher tax revenues as well. So this is where you will also see additional revenue coming into government coffers to offset that extra finance spending on subsidies,” Ling explained.
OPR to remain unchanged
Separately, Ling expects Bank Negara Malaysia (BNM) to keep the overnight policy rate (OPR) unchanged at 2.75% for the remainder of 2026 as inflation remains within the central bank’s expectations.
“So far for the first half of this year, inflation has averaged at 1.7%. For the second half, we do expect inflation to be higher, but overall for the year, still at 2%,” she said.
She added that the OPR could normalise to 3% in 2027, provided Malaysia’s economy expands by around 5% and inflation continues to trend higher.
BNM has projected headline inflation to average between 1.5% to 2% this year.
The OPR has remained at that level since July 2025, when the central bank reduced it by 25 basis points from 3%.