Malaysia has kept the price of RON 95 fuel, mainly used by households, unchanged. This limits the fiscal cost of subsidies to about 0.2% of GDP if crude oil stays below USD 100 per barrel over the year.
The extra subsidy cost since the Middle East conflict is expected to remain within that range if the average oil price does not exceed USD 100. Any further currency depreciation against the US dollar would increase subsidy costs.
Estimated subsidy costs are 0.2% of GDP in Malaysia and 0.6% of GDP in Indonesia, assuming currencies remain stable at current levels. These estimates depend on oil prices and exchange rates.
Countries described as most exposed include those with high interest burdens such as India. Exposure is also linked to shorter debt maturities, more foreign-held debt in Indonesia and Malaysia, and higher shares of foreign-currency debt in Indonesia.
In Malaysia, government debt is 65.3% of GDP, with 21.1% of the total held by foreign residents. Long debt maturities and developed domestic capital markets are stated as factors that reduce sensitivity to global yield swings.
We see Malaysia’s public finances as conditionally stable, largely due to the managed fuel subsidy for RON 95. This stability hinges on crude oil staying below the critical USD 100 per barrel mark. With Brent crude recently touching USD 96 on supply concerns, that ceiling is now being tested.
The Malaysian Ringgit is the primary instrument to watch for any fiscal stress. The currency has been stable around the 4.75 level against the dollar, but we recall its sensitivity during the commodity price swings of 2025. Buying out-of-the-money USD/MYR call options offers a low-cost way to position for a potential breakout if oil prices rise further.
While long maturities on government debt provide a buffer, the 20.5% foreign ownership remains a key vulnerability. We’ve seen a slight dip in foreign holdings this year, suggesting some sensitivity to global yield movements. Any unexpected hawkish signals from the US Federal Reserve could pressure Malaysian Government Securities (MGS) yields higher.
From a relative value perspective, Malaysia appears more insulated than some of its neighbors. Indonesia faces higher subsidy costs, as noted last year, and greater foreign currency debt exposure. A pair trade, going long the Malaysian Ringgit while shorting the Indonesian Rupiah, could hedge against broader emerging market risks.
