Malaysia to Cut Petrol Subsidy From 2025 to Slash Deficit

Malaysian Prime Minister Anwar Ibrahim is counting on petrol subsidy cuts and accelerating growth to help reduce the fiscal deficit even as he unveils his biggest annual spending plan yet on Friday.

(Bloomberg) — Malaysian Prime Minister Anwar Ibrahim is counting on petrol subsidy cuts and accelerating growth to help reduce the fiscal deficit even as he unveils his biggest annual spending plan yet on Friday. 

The government plans to cut the subsidy for the widely-used RON95 petrol from mid-2025, Anwar said in his budget presentation to parliament. It is part of the government’s plan to dial back on subsidies and social assistance for a second straight year, by 14.4% to 52.6 billion ringgit ($12.2 billion). 

“It cannot be denied that foreigners and the top 15% of the super-rich consumers enjoy 40% of the RON95 subsidy worth 8 billion ringgit,” he told lawmakers. This can “be better utilized for the improvement of educational facilities, health as well as public transportation,” he added. 

The measures enable Anwar to target a narrower budget gap to 3.8% of gross domestic product, from 4.3% this year. Rebuilding fiscal health is key for Malaysia to retain emerging Southeast Asia’s highest credit score, and keep investors’ faith as Anwar looks to turn the nation into a global artificial intelligence hub. 

Anwar, who doubles as finance minister, also said the government will broaden the scope of its sales and services tax from May next year. The tax applies to non-essential items such as premium imported goods and will be widened to cover commercial services. Dividend income will also get taxed from 2025.

The Malaysian ringgit, the best performer across emerging markets this year, held earlier gains to trade at 4.3045 per dollar. Benchmark 10-year bond yields were steady at 3.79%. 

“The budget has hit the right notes in terms of trying to widen the tax base and reduce RON95 subsidies,” said Lavanya Venkateswaran, an economist at Oversea-Chinese Banking Corp. in Singapore. “But it requires follow through in order to achieve the deficit target in 2025.”

Growth is set to quicken to within 4.5% to 5.5% next year, from a revised forecast range of 4.8% to 5.3% in 2024 on improved global trade, and robust domestic consumption, according to an economic report released earlier on Friday. The 2025 projection largely exceeds a 4.6% expansion predicted by analysts surveyed by Bloomberg.  

Malaysia’s debt-to-GDP ratio is projected to stay around 64% by the end of this year and 2025. Anwar’s administration has said in 2023 that it wants to reduce public debt to 60% of GDP within a five-year time frame. 

Anwar is counting on his reforms and the resilient economy to weather Malaysia through any geopolitical and market storms — as well as ensure his longevity after a revolving door of leaders since 2018. 

The government will increase spending by 3.3% in 2025 to 421 billion ringgit to account for higher operational expenditure, including on civil servants’ wages and retirement pay. Development spending will remain the same as in 2024, at 86 billion ringgit.  

Some upward inflation pressure could emerge from anticipated policy measures, according to the report — the government plans to implement a new minimum wage rate while civil servants will see a pay bump that will roll out in phases. Inflation is forecast to average within 2% to 3.5% in 2025, from a lowered projection range of 1.5% to 2.5% this year.

Cash handouts for poorer Malaysians will increase to 13 billion ringgit from 10 billion ringgit this year, Anwar said.  

The prime minister plans to increase allocations for transport and housing development next year, after cutting back in 2024. New projects include constructions of a bridge and road in Sarawak in Borneo island, an additional lane for a portion of a major highway in southern Johor state, and public housing.

The government will also establish an “infrastructure facilitation fund” for its cross-border special economic zone with Singapore that’s located in Johor, and will set aside funds for the development of Silver Valley Technology Park 1 in northern Perak state. Both are aimed at attracting investment and boosting regional economic growth, according to the finance ministry report.

Other key points from Anwar’s budget speech:

• Malaysia will introduce an investment incentive framework from third quarter of 2025
• Government plans to introduce a 2% tax on dividend income that exceeds 100,000 ringgit from the 2025 year of assessment
• As the world’s second-largest producer of palm oil, Malaysia will raise the threshold for a windfall profit levy
• A carbon tax will be imposed on iron, steel and energy industries by 2026

—With assistance from Nurin Sofia, Ronojoy Mazumdar and Joy Lee.

(Updates throughout.)