Malaysia's Second Finance Minister, Datuk Seri Amir Hamzah Azizan, has indicated that the country might miss its 2026 fiscal deficit targets because of increased fuel subsidy expenditures, which have surged due to the Iran war. The most popular petrol, RON95, is maintained at 1.99 ringgit ($0.50) per liter, one of the lowest prices globally. While the government reduced the amount of subsidized RON95 individuals can purchase starting in April, the fuel subsidy bill in May still amounted to 3.5 billion ringgit, down from 7.5 billion ringgit in April, which was ten times its pre-war level. Despite this, Amir stated that protecting vulnerable groups is the government's priority, and he remains confident in achieving the medium-term goal of bringing the fiscal deficit to below 3% of GDP by 2028, from 5.5% in late 2022.
Foreign investors have recently turned into net sellers of Malaysian bonds, withdrawing 4.3 billion ringgit from the local debt market in May after net inflows of 3.8 billion ringgit in April. This shift is attributed to escalating geopolitical tensions in the Middle East and rising US Treasury yields, which have dampened appetite for emerging market assets. Government securities bore the brunt of the selling, with 6.9 billion ringgit in foreign selling in May. Foreign ownership of Malaysian Government Securities (MGS) slipped to 33.6% from 34.1%.
Despite the immediate challenges and foreign outflows, Malaysia's policymakers note that fuel supplies are secure until July, and efforts are underway to secure alternative crude sources. The country aims for a 4% to 5% GDP growth in 2026, with the first-quarter growth at 5.4%. Analysts from Kenanga Research expect Malaysian bond yields to remain range-bound, supported by stable domestic conditions, with external risks like geopolitical tensions posing an upside risk to yields. Malaysia is viewed as a relatively stable regional safe haven, with foreign investor interest expected to recover once geopolitical tensions and interest rate volatility moderate. The ringgit, after being a strong performer earlier in the year, weakened over 2% in June.
