KUALA LUMPUR: The 2027 Budget's lower-than-expected fiscal deficit target of 3.3 per cent is positive for markets, but the impact will depend on how the government achieves its consolidation target.
Moomoo Malaysia strategist Yu Junqiang said net fiscal consolidation amounted to RM1 billion, with most of the improvement in the deficit-to-GDP ratio driven by nominal GDP growth rather than lower government expenditure.
He said the fiscal trajectory would therefore remain closely tied to economic performance over the coming year.
"Two assumptions carry much of the weight. Fuel subsidies are capped at RM40 billion, a tight ceiling whose outcome will depend on crude prices and the pace of subsidy rationalisation.
"The revenue estimates also do not yet reflect the tax cuts announced in the budget," he said in a statement.
On equities, Yu said investors should favour sectors with clearly identified allocations and implementation timelines, as these were more likely to translate into project flows.
For fixed income, he said the outlook for Malaysian Government Securities (MGS) was slightly positive, supported by lower gross issuance as a result of reduced maturities and a projected decline in the debt-to-GDP ratio to 63.7 per cent in 2027.
"Investors should monitor demand at upcoming 10-year and 30-year MGS auctions, with stronger bid-to-cover ratios potentially signalling greater confidence in the government's fiscal trajectory," he said.
Meanwhile, Yu said the ringgit's direction is expected to remain largely influenced by external factors, particularly US Federal Reserve policy and global crude oil prices, rather than domestic fiscal measures.
At the sectoral level, Yu identified banks as net beneficiaries, citing the absence of a windfall tax and continued support for lending through RM20 billion in housing credit guarantees under SJKP and RM11.6 billion in financing facilities for small and medium enterprises (SMEs) and microfinance.
On Malaysia's sovereign credit outlook, Yu does not expect rating action following the budget, although rating agencies could view the fiscal measures as mixed to slightly negative.
He said tax revenue, at 12.8 per cent of GDP, remained a key consideration, particularly as the budget prioritised income tax cuts over measures to broaden the tax base.
"Debt servicing costs are also expected to rise 6.5 per cent to RM61 billion, equivalent to 16 per cent of revenue and above the Finance Ministry's 15 per cent threshold.
"These metrics are likely to remain under scrutiny by rating agencies, including Fitch Ratings and Moody's Ratings," he said.
Yu said the 3.3 per cent deficit target alone was unlikely to trigger a sovereign rating upgrade, with more meaningful progress in broadening the tax base likely to be a stronger driver of future improvements.
He said investors should focus on demand at upcoming MGS auctions and any further details on revenue measures to assess the credibility of the government's fiscal consolidation plans.
Overall, Yu expects the budget to provide selective support for equities, a modest boost for MGS and a broadly neutral impact on the ringgit, which will continue to take its cue from external developments.
© New Straits Times Press (M) Bhd