Fitch: Malaysia’s budget a step towards fiscal consolidation
Fitch Ratings assessed Malaysia’s latest budget as a step towards gradual fiscal consolidation, despite a high debt level compared to its peers, according to its report on Tuesday.
“The Malaysian authorities’ latest budget reaffirms a commitment towards gradual fiscal consolidation from a high debt level compared with peers,” Fitch report read.
The government’s strategy of rationalising subsidies could potentially lead to positive macroeconomic outcomes, provided that fiscal reforms effectively redirect resources to lower-income groups with a higher propensity to consume.
Malaysia unveiled its budget on 18 October, forecasting a deficit of 3.8 per cent of GDP in 2025, a decrease from the estimated 4.3 per cent in 2024. These figures align with Fitch’s assumptions when Malaysia’s rating was affirmed at ‘BBB+’ with a stable outlook in June 2024.
The budget reaffirmed the goal of the Public Finance and Fiscal Responsibility Act (FRA) to decrease the deficit to three per cent of GDP and federal government debt to less than 60 per cent of GDP in the medium term.
However, it did not provide a specific timeline for achieving this target. As of June 2024, federal government debt was at 63.1 per cent of GDP. The medium-term fiscal plan anticipates deficits averaging 3.5 per cent of GDP from 2025 to 2027.
The government expects revenue collection in 2025 to be around 16.3 per cent of GDP, down from 16.5 per cent in 2024, mainly due to lower petroleum-related revenues. Fitch’s forecast for Brent oil prices in 2025 is USD70/bbl, below the government’s range of USD75-80/bbl, indicating further revenue risks.
The budget introduced new revenue-raising measures, such as a two per cent tax on individual dividend income and higher excise duties on sugary drinks. The sales and service tax were also adjusted to be more progressive.
However, the overall impact of these measures is expected to be limited. The government plans to focus on improving Sales and Services Tax collection instead of reintroducing the Goods and Sales Tax, unless the minimum wage reaches MYR3,000-4,000 per month, which is still a distant target. The minimum wage was increased to MYR1,700 a month in the budget, up from MYR1,500.
The budget forecasts a decrease in expenditure to 20.2 per cent of GDP in 2025, down from 20.9 per cent in 2024, as the government continues to overhaul Malaysia’s subsidy system by cutting subsidies for higher-income individuals.
After reducing electricity subsidies in 2023 and implementing diesel subsidy reforms in June 2024, the government plans to gradually extend the targeted subsidy approach to petrol (by mid-2025), education, and healthcare.
The decision to allocate a significant portion of savings from subsidy reform to increased social assistance and higher civil servant wages will result in a slower pace of debt reduction for Malaysia.
Fitch anticipates Malaysia’s general government debt/GDP ratio will fall from 76.7 per cent in 2023 to 73.7 per cent in 2026. This level will still be higher than the median of 59.1 per cent for ‘BBB’ category sovereigns in 2026, but the gap between Malaysia and its peers is expected to narrow over the period of 2024-2026.
Attribution: Fitch Ratings report
Subediting: Y.Yasser
