PETALING JAYA: The longer Malaysia delays structural reforms, the more exposed it becomes to fiscal pressures, as volatile oil prices, rising debt-servicing costs and off-budget obligations threaten to complicate its fiscal consolidation plans, economists say.

OCBC senior Asean economist Lavanya Venkateswaran said subsidy rationalisation was one reform that could no longer be postponed.

“Malaysia needs a framework that remains effective even when oil prices rise.

“What we have seen is that subsidy rationalisation measures tend to be watered down whenever oil prices exceed certain thresholds,” she said.

The medium-term fiscal outlook assumes oil prices of US$78 per barrel (bbl) over the next three years, compared with current prices of between US$90 and US$100 per bbl.

Former Deputy Investment, Trade and Industry Minister and Taylor’s University adjunct professor Ong Kian Ming questioned whether the government could maintain its projected RM40bil petrol subsidy allocation if prices remained elevated, particularly with elections approaching.

Lavanya suggested a tiered petrol subsidy system, under which the first 100 litres would be fully subsidised, the next 50 litres would receive a lower subsidy, and subsequent consumption would be subject to progressively higher prices.

Beyond subsidies, Ong said potential US interest rate hikes could raise Malaysia’s borrowing costs, while repayments for the East Coast Rail Link are expected to begin next year, potentially adding around RM3bil in expenditure based on preliminary estimates.

“Much of this exposure may arise from off-budget items, but these obligations still need to be financed,” he said, adding that borrowing by government-linked entities and higher debt-servicing costs warrant monitoring.

OCBC Malaysia global markets head of interest rate derivatives Eric Lok said broadening the tax revenue base would also be important, although improving collection, compliance and enforcement should remain immediate priorities.

“Ultimately, Malaysia may also need to broaden its tax revenue base.

“However, improving tax collection, compliance and enforcement should remain the immediate priorities, including efforts to minimise leakages and abuse.”

Budget 2027 also presents implementation challenges, including the proposed minimum wage for graduates.

Economists have raised concerns over identifying eligible graduates and defining semi-skilled jobs, while a RM2,500 wage floor could affect employability in less developed states if graduates’ skills do not match employers’ requirements.

Meanwhile, larger corporations have received relatively few new incentives, despite facing higher minimum wages and operating costs.

Economists said Malaysia must sustain its investment appeal, while addressing infrastructure constraints.

Data centre (DC) investments face electricity and water supply limitations, with applicants reportedly required to demonstrate power offtake agreements and, more recently, their ability to generate their own power.

Nevertheless, Ong remained cautiously optimistic about Malaysia’s investment and export outlook, citing China Plus One and Taiwan Plus One strategies that have benefited South-East Asia.

Potential free trade agreements involving the European Union and Malaysia, the Philippines and Thailand in 2027 could further diversify trade and support regional exports, he said.

Ong added that Malaysia should integrate its semiconductor, DC and renewable energy strengths to attract investment and move up the value chain through sustainability technology and energy optimisation.

All in all, Ong described Budget 2027 as a “clever” budget that balanced assistance to households with fiscal consolidation. Lavanya noted the projected deficit reduction to 3.3% of gross domestic product in 2027 from 3.6% in 2026.

However, questions remain over whether reforms and investment policies would endure if the political landscape changes.

Lavanya said political uncertainty alone might not deter investment, pointing to DC investments that flowed into Malaysia after the Covid-19 pandemic despite domestic political uncertainty.