Oil prices, subsidy delay may derail Malaysia's revenue target

New Straits Times

16-06-2025

KUALA LUMPUR: Malaysia may fall short in achieving its revenue target this year due to soft oil prices and possible delays in the RON95 fuel subsidy rationalisation, some economists say.
Oil prices have averaged below the government's budgeted level, although the benchmark Brent crude surged more than nine per cent to around US$75 a barrel last Friday, its highest in five months, after Israel struck Iran.
Prior to the rally late last week, crude prices had averaged US$70 a barrel versus the government's 2025 Budget assumption of US$80.
Economists said a prolonged soft oil prices raised the risk of petroleum income tax falling short of its target.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the correlation between Brent crude oil prices and Petroleum Income Tax (PITA) is about 87 per cent.
He added that the strong correlation suggests any deviation from the price assumption would have a material impact on PITA collection.
"There is a possibility that revenue collection may not be achieved, especially when the deviation from the price assumption becomes protracted," he told Business Times.
CIMB Securities estimates that PITA may come in RM2.7 billion off the expected RM20.7 billion this year, based on Brent average of US$70 a barrel.
Afzanizam noted that for the first four months, the government's revenue collection stood at RM97.1 billion.
If annualised, this amounts to about RM291.2 billion, which may fall short of the government's full-year revenue target of RM339.7 billion.
Widening gap
As for RON95, Afzanizam said the gap between the estimated market price and the subsidised price has increased.
His estimates show the market price for RON95 is about RM2.85 per litre, given the prevailing Brent crude price and exchange rate levels.
"Given this, the difference between the market price and subsidised prices was at RM0.80 per litre.
"Prior to this, the estimated market price for RON95 was about RM2.60 per litre when Brent Crude was around US$64 per barrel and the US dollar-ringgit at around RM4.22 to RM4.23, giving RM0.55 difference.
"Hence, the gap with the subsidise prices has widened," he said.
In the grand scheme of things, the prevailing conditions have become increasingly challenging, Afzanizam added.
Echoing similar views, UOB Kay Hian Wealth Advisors Sdn Bhd head of investment research Mohd Sedek Jantan said the targeted RM339.7 billion revenue collection could be slightly lower due to softer oil prices and possible delays in the RON95 fuel subsidy rationalisation.
He pointed out that while global oil prices have eased, commodity markets remain volatile as they are driven by finite resources, and prices could rise again.
Nevertheless, he said the current environment offers a window for the government to proceed with RON95 subsidy rationalisation in the second half of 2025 (2H25).
"Lower global oil prices may help cushion the initial inflationary impact, making this more in line with the government's broader fiscal consolidation plans under the Fiscal Responsibility Act 2023.
"Rationalisation, supported by targeted subsidies, could bring the fiscal deficit down to 3.8 per cent of gross domestic product (GDP) in 2025, offsetting the drop in petroleum-related revenue, especially as Malaysia remains a net oil exporter," he said.
However, he warned that a rebound in oil prices to the US$80-US$90 per barrel range could lead to renewed inflationary pressures.
Collection target may still be met
Conversely, Williams Business Consultancy Sdn Bhd director Dr Geoffrey Williams believes that the government revenue target is likely to be achieved due to strong economic fundamentals and the new Sales and Service Tax (SST) changes, which will add RM5 billion.
He added that the Inland Revenue Board and the Customs Department are also improving collection process and e-payments and e-invoicing will help collection especially from larger companies.
"I do not see any delay in RON95 subsidy rationalisation because the government is already committed to this. Anyway this will save money and help improve the fiscal position," he said.
Williams noted that so far this year in 1Q25, total government revenue was RM72.1 billion, up three per cent from the same quarter in 2024.
He added that the Q1 fiscal deficit was RM21.9 billion lower than the RM26.4 billion in 1Q24 due to better revenue collection and expenditure optimisation.
"So the fiscal position is in good shape and will improve due to SST changes, subsidy rationalisation and more efficient spending cutting wastage, leakages and corruption," he said.
Commenting further, Williams said oil prices have been always volatile. In the last five years, they had been as low as US$25 and as high as US$125 a barrel.
"Even this month they have been below US$70 and above US$78. So they are inherently difficult to forecast.
"The escalating conflict in the Middle East has forced prices up and this is likely to persist as long as uncertainties remain. So the downside risk has reduced for very unfortunate reasons," he added.