KUALA LUMPUR: Malaysia's plan to narrow its fiscal deficit to 3.3 per cent of gross domestic product (GDP) in 2027 faces pressure from elevated subsidy costs and social spending, Fitch Ratings said.
The target compares with a revised deficit of 3.6 per cent for 2026 and maintains the government's medium-term fiscal consolidation path, although spending pressures could limit the pace of improvement.
The 2026 deficit target was initially set at 3.5 per cent of GDP, but higher subsidy costs pushed revised expenditure nearly six per cent above the original budget.
Total expenditure in 2027 is projected to increase 3.6 per cent from the revised 2026 base, while development expenditure is budgeted to rise 2.5 per cent.
Under the 2027-2029 Medium-Term Fiscal Framework (MTFF), the government targets an average fiscal deficit of 3.1 per cent of GDP, compared with 3.2 per cent under the previous 2026-2028 framework.
Fitch said achieving the targets would depend on revenue collection and more efficient subsidy mechanisms.
This could become more challenging if oil prices remain elevated or social spending pressures persist ahead of the election.
The MTFF assumes average real GDP growth of five per cent, at the upper end of the government's 2027 growth forecast of 4.2 to 5.2 per cent and above Fitch's projection of 4.5 per cent.
Subsidies and social assistance will remain a major fiscal constraint, with allocations budgeted at RM72.7 billion, or about 3.1 per cent of GDP, in 2027.
This follows a nearly 35 per cent upward revision in the allocation to RM74.5 billion for 2026.
Fitch said the government has retained petroleum price caps and introduced a similar mechanism for diesel from July 2026, alongside additional household and business support, including higher cash assistance and tax reductions.
Revenue is projected to grow 4.7 per cent in 2027, supported by economic expansion, stronger tax collection and compliance, and contributions from government-linked entities.
These include RM32 billion from Petroliam Nasional Bhd, RM3 billion from sovereign wealth fund Khazanah Nasional Bhd and RM7 billion from Bank Negara Malaysia.
Stronger-than-expected revenue collection in 2026 has partly offset the higher subsidy bill, Fitch said.
Government debt is expected to continue declining gradually, supported by nominal GDP growth and the planned reduction in the fiscal deficit.
Fitch expects debt to fall to about 74 per cent of GDP in 2027 from 77.3 per cent in 2025.
However, the projected level remains substantially above the 'BBB' rating category median of 57.4 per cent.
Its debt measure includes committed guarantees, estimated at 11.4 per cent of GDP in 2026.
Fitch said a sustained reduction in government debt relative to GDP towards peer medians, supported by fiscal consolidation or stronger growth prospects, could put upward pressure on Malaysia's 'BBB+' sovereign rating, which carries a Stable Outlook.
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