KUALA LUMPUR (June 15): Malaysia will likely miss its fiscal target this year as fuel subsidy bill balloons and growing political pressure make any cuts to the programme increasingly difficult, a research firm said.

Budget deficit as a percentage of economic output could reach 4.5% for 2026 versus the official target of 3.5%, according to Pantheon Macroeconomics. While complete subsidies removal is unlikely, any further cuts offer little fiscal gain while carrying acute political costs, the UK-based firm noted.

“Maintaining blanket subsidies remains the most likely political outcome, despite the severe hit to fiscal headroom,” Pantheon Macroeconomics said.

Johor and Negeri Sembilan are holding elections in the coming weeks. The state-level elections are shaping up to test the durability of the incumbent coalition government, as well as act as bellwethers ahead of the 16th general election that must be held by February 2028.

Malaysia has been trying to close a long-running budget deficit that stretches back more than two decades to the Asian Financial Crisis. The aim is to narrow the gap between income and expenditure to 3% of gross domestic product by 2028.

The statutory debt, which excludes offshore borrowings, has reached 64% of gross domestic product as of June 2025. Under its fiscal laws, the government has to keep its outstanding statutory debt under 65% of the total value of goods and services produced in the country.

However, government-guaranteed debt adds another 17 percentage points, pushing the public sector debt to above 80% of gross domestic product.

While the bond market is likely to shrug off the slippage, the build-up in debt would leave Malaysia with less room to deal with future economic shocks or fund development projects, Pantheon Macroeconomics economists Miguel Chanco and Meekita Gupta wrote in a joint note.

The spending on fuel subsidies have jumped nearly 10 times to over RM7 billion in April since the outbreak of the Iran war at the end of February, before halving to about RM3.5 billion in May, according to Finance Minister II Datuk Seri Amir Hamzah Azizan.

“The real threat lies in the long-term ramifications,” they wrote. “Malaysia desperately needs to shrink its massive subsidy bucket to fund future development, and continued fiscal slippage risks sovereign downgrades, which in turn could raise long-term rates.”