KUALA LUMPUR (June 26): Malaysia’s economy may slow from spending cuts due to lower government revenue, even if interest rates are cut, according to the Australia and New Zealand Banking Group (ANZ Research).

A growing number of economists expect Bank Negara Malaysia (BNM) to deliver a 25-basis-point rate cut at its July 9 meeting.

ANZ said that any boost from looser monetary policy may be offset by limited government fiscal space, unless the government eases its 2025 budget deficit target of 3.8% of gross domestic product (GDP).

"Our concern is that lower-than-budgeted revenue offtake may force the authorities to scale back budgeted spending," ANZ said in its third-quarter Asia Economic Outlook report.

Revenue growth for January to April stood at 4.2% year-on-year, falling short of the government’s full-year target of 5.2%. Lower crude oil prices — which have weighed on earnings at state-owned oil company Petronas — could further drag government revenue, it added. Petronas contributed around 10% of total government revenue in 2024.

While the upcoming sales and service tax (SST) expansion in July may provide some relief, ANZ noted it is unlikely to fully make up for the expected revenue shortfall.

"A timely implementation of petrol subsidy rationalisation in 2H (the second half of) 2025 is now critical," the house said.

ANZ forecasts Malaysia’s full-year 2025 GDP growth at 4.1%, below the government’s earlier estimate of 4.5% to 5.5%, citing weaker exports and slower business investment.

Private consumption is expected to remain sluggish due to falling real incomes. While a strong rebound in spending is unlikely, recent increases in minimum wages and civil servant pay may offer some support, it said.

Inflation is projected to average 2% in 2025, slightly lower due to softer commodity prices, ANZ Research noted. However, electricity tariff hikes and fuel subsidy reforms could push inflation higher in the second half of the year.

On the external front, ANZ forecasts the current account surplus to narrow to 1.2% of GDP, weighed by softer exports and sustained capital goods imports. Foreign direct investment is also expected to slow, while ongoing financial market volatility may trigger portfolio outflows.

All in all, Malaysia is projected to record a small balance of payments — when a country spends more money abroad than it earns — deficit of 0.2% of GDP in 2025, it added.