Kuala lumpur: Malaysia is projected to maintain its fiscal deficit close to the original target for 2026, despite an additional RM25 billion allocation for fuel subsidies, with the deficit expected to stand at 3.6 percent of the gross domestic product (GDP).

According to BERNAMA News Agency, Hong Leong Investment Bank (HLIB) chief economist Felicia Ling addressed this topic at a virtual economic briefing organized by the Institute of Chartered Accountants in England and Wales (ICAEW) Malaysia. Ling noted that the slight increase from the government's original target of 3.5 percent reflects the administration's capacity to manage higher subsidy spending through enhanced revenue collection, expenditure reprioritization, and dividend income, rather than increased borrowing.

Prime Minister Datuk Seri Anwar Ibrahim had previously announced a substantial increase in this year's fuel subsidy allocation, bringing the total to RM40 billion for 2026. This move aims to maintain the RON95 subsidized petrol price at RM1.99 per litre, with the additional RM25 billion equivalent to 1.2 percent of GDP.

HLIB anticipates only a minor rise in the fiscal deficit since subsidy spending is part of operating expenditure, which, by law, must be funded through revenue rather than additional debt. Ling emphasized the necessity for the government to either boost revenue or cut other operating expenses to accommodate the subsidy increase while adhering to fiscal discipline.

Supporting the fiscal outlook is the government's bond issuance program, which remains largely unchanged, indicating no significant need for higher borrowing despite the added subsidy expenditure. Ling highlighted that the government has already issued about 50 percent of the total planned government bond issuance for the first half of the year, consistent with past trends.

HLIB estimates that RM11 billion of the additional subsidy requirement could be met through increased government revenue, with another RM5 billion from operating expenditure savings and a further RM5 billion from dividend income. Ling also pointed out the absence of a special financing mechanism similar to the COVID-19 Fund, suggesting the government's intention to manage the additional subsidy spending within the current fiscal framework.

The initial RM15 billion allocation for fuel subsidies this year was depleted in the first five months, primarily due to rising global oil prices following the West Asia conflict. This underscores the challenges faced by the government in maintaining fiscal targets while accommodating necessary subsidy expenditures.