Higher Petronas dividends expected to cover rising fuel subsidies in Malaysia

Malaysia's government may receive a substantial boost to its finances through higher dividend payments from national oil company Petronas, driven by elevated global oil prices. BIMB Securities forecasts Petronas's dividend payout to reach approximately $33.5 billion this year, a significant increase from the $20 billion initially projected in the 2026 Budget.

This projected surge in dividends is crucial for the government's fiscal stability. It is expected to help offset a near doubling of fuel subsidies, which are now estimated to cost around $40 billion. This increase is attributed to the sustained high price of Brent crude oil, with the average price forecast at $95 per barrel for 2026, compared to the budget's assumption of $65 per barrel. The report noted that historically, Petronas's dividend payments correlate positively with average oil prices, though capital expenditure and cash flow also influence decisions.

"We expect oil prices to remain elevated throughout the year, supported by ongoing geopolitical risks and strong demand, particularly from refiners rebuilding inventories," BIMB Securities stated. The firm maintains its average Brent price projection of $95 per barrel for the full year.

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From a historical perspective, Petronas's dividend payments show a positive correlation with the average oil price, although payment decisions also depend on capital expenditure requirements, cash flow generation, and national development priorities.

Despite the pressure on subsidies, Malaysia's economic outlook remains robust. The country's economic growth is anticipated to exceed 5.0% this year, surpassing Bank Negara Malaysia's forecast of 4.0% to 5.0%. This stronger growth could provide a welcome boost to tax and non-tax revenue collections.

However, if development expenditure remains at $81 billion, the fiscal deficit is projected to widen to 3.8% of GDP, exceeding the budget target of 3.5%. For 2027, BIMB Securities anticipates a moderation in Brent prices to around $85 per barrel as geopolitical tensions ease and supply conditions stabilize, which should reduce the need for fuel subsidies and lower Petronas's dividend payments.

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We expect oil prices to remain elevated throughout the year, supported by ongoing geopolitical risks and strong demand, particularly from refiners rebuilding inventories and topping up stocks after several years of tight supply conditions.