KUALA LUMPUR (Oct 10): Malaysia’s fiscal consolidation remains on track, but rating agencies have flagged that the country’s progress is being driven more by spending cuts than stronger revenue growth.
While Malaysia has largely met its budget pledges and the economy is resilient against external risks, revenue growth has trailed the pace of economic expansion, Moody's Ratings senior analyst Christian de Guzman said in reaction to the Budget 2026 announcement.
“As such, the gains in fiscal consolidation have not been sufficient to reverse the ongoing deterioration in debt affordability, as measured by interest payments relative to revenue,” he said.
While Malaysia’s general government debt is gradually coming down, it is "still above the median for Fitch-rated ‘BBB’ category sovereigns", said Fitch Ratings associate director and sovereigns analyst Kathleen Chen.
Government debt including committed guarantees stood at 76.5% of gross domestic product (GDP) as of end-June 2025, according to Fitch’s estimates compared with the 58% median for BBB-rated sovereigns.
Savings from the recent RON95 petrol subsidy retargeting are "expected to yield smaller savings than the targeted diesel subsidy" rolled out a year ago, Chen said.
Nonetheless, "a downward trend in general government debt GDP closer to peer medians — supported by a strong consolidation strategy and/or improved growth prospects — could put upward pressure on the rating", Chen said.
Those savings from subsidy rationalisation of about RM15.5 billion annually represent about 0.8% of 2025 GDP, compared with total expenditure which is expected to grow about 1.7%, according to Fitch's forecasts.
Moody’s last affirmed its rating of A3 in January this year. Fitch still rates Malaysia as BBB+ while S&P’s credit rating stands at A-. All three agencies’ ratings are investment-grade and come with a ‘stable’ outlook.
"Malaysia’s 2026 budget maintains the themes of gradual fiscal consolidation and modest expenditure recalibration. The Federal government’s targeted deficit of 3.5% of GDP for next year is broadly in line with our expectations. The lower subsidy bill, supported in part by the government’s recently implemented RON95 subsidy mechanism, will help to offset the decline in the planned dividend from Petronas amid lower oil prices," said Andrew Wood, a sovereign analyst at S&P.
Malaysia has been trying to close a long-running budget deficit that stretches back more than two decades. The government has been rolling back blanket fuel subsidies widely panned as wasteful by economists and expanded the sales and service tax regime.
The budget shortfall as a proportion of economic output is expected to fall to 3.5% in 2026 from this year’s projected 3.8%, according to the Ministry of Finance.
The projected narrowing of the fiscal deficit remains in line with the government’s obligations under the Public Finance and Fiscal Responsibility Act 2023 to reduce the deficit to 3% of GDP over the medium term, the rating agencies said.
“The resilience of the economy to deteriorating external conditions has provided space for fiscal consolidation even as the government initiates funding for the implementation of the recently unveiled 13th Malaysia Plan,” de Guzman noted.