Malaysia’s 2027 budget maintains a gradual reduction in the fiscal deficit despite elevated subsidy and social-support spending, with a general election due by February 2028, Fitch Ratings said.
The deficit target of 3.3 percent of GDP, from a slightly upward revised 3.6 percent in 2026, preserves the government’s medium-term consolidation path, the rating agency said in a statement on Tuesday.
Continued spending pressures are likely to constrain the pace of fiscal consolidation, the rating agency noted.
The 2026 deficit target was initially 3.5 percent of GDP, but higher subsidy costs lifted revised spending by nearly 6 percent. Total expenditure in 2027 is budgeted to rise 3.6 percent from this revised base, while development expenditure increases by 2.5 percent.
The 2027–2029 Medium-Term Fiscal Framework (MTFF) targets an average deficit of 3.1 percent of GDP, compared with 3.2 percent under the previous 2026-2028 MTFF, implying a gradual consolidation path towards the 3 percent deficit target.
Achieving this will depend on revenue delivery and more efficient subsidy mechanisms, which could become more challenging if oil prices remain high or social spending pressures persist, particularly as the general election approaches.
The MTFF assumes average real GDP growth of 5 percent, which is at the high end of the government’s 2027 growth target of 4.2 percent-5.2 percent and above Fitch’s projection of 4.5 percent in 2027.
Subsidy measures will remain a significant fiscal constraint in 2027. Allocations for subsidies and social assistance are budgeted at MYR72.7 billion, or around 3.1 percent of GDP, following a nearly 35% upward revision to MYR74.5 billion in 2026.
The government has retained petroleum price caps and introduced a similar diesel mechanism from July 2026, while also providing additional household and business support, including higher cash aid and tax reductions.
Revenue is projected to increase 4.7 percent in 2027, supported by economic growth, improved tax collection and compliance, as well as contributions from government entities.
These include MYR32 billion from national oil company Petronas, MYR3 billion from sovereign wealth fund Khazanah and MYR7 billion from central bank Bank Negara Malaysia. Stronger-than-expected revenue collection in 2026 has partly offset larger subsidy allocations, the agency added.
Government debt should continue to decline gradually, supported by nominal GDP growth and the planned deficit reduction.
“We expect debt to fall to around 74 percent of GDP in 2027 from 77.3 percent in 2025, although this remains substantially above the ‘BBB’ median of 57.4 percent. Our debt measure includes committed guarantees, which is estimated at 11.4% of GDP in 2026,” Fitch Ratings added.
A sustained decline in government debt/GDP towards peer medians, supported by fiscal consolidation or strong GDP growth prospects, could put upward pressure on Malaysia’s rating of ‘BBB+’ with Stable Outlook, it said.