KUALA LUMPUR (Oct 13): Malaysia's efforts to narrow its fiscal deficit could face challenges from persistently high subsidy costs, particularly if the US-Iran conflict continues to drive up energy prices, according to BMI, a Fitch Solutions company.
In a note reviewing Budget 2027, BMI said that spending could exceed the government's projections should the conflict in the Middle East persist longer than anticipated, despite the allocation being expected to ease to RM72.7 billion in 2027.
“Even under the government’s projections, subsidies and social assistance spending remain high by historical standards, accounting for 19.3% of the operating budget and constituting the second-largest expenditure item after salaries,” said BMI.
It maintained its forecast for Malaysia's fiscal deficit to narrow to 3.4% of gross domestic product (GDP) in 2027, from an estimated 3.6% this year. This is slightly above the government's target of 3.3% for next year.
BMI said the increase in energy costs had already prompted the government to raise its allocation for subsidies and social assistance to RM74.5 billion for 2026, substantially higher than the RM49 billion initially budgeted.
At RM72.7 billion, subsidies and social assistance would account for 19.3% of the government's operating expenditure next year, making it the second-largest spending component after emoluments.
The continued pressure on operating expenditure, which makes up about 82% of total government spending, could also constrain allocations for development projects, BMI said.
Budget 2027 earmarks RM83 billion for development expenditure, below the RM86 billion annual average required to meet the government's RM430 billion development spending commitment through 2030.
BMI warned that insufficient development spending could affect Malaysia's longer-term ambitions to raise productivity and encourage innovation.
Nevertheless, higher oil prices could provide some relief on the revenue front, given Malaysia's position as a net energy exporter.
Petroleum-related revenue is expected to edge up to 2.6% of GDP in 2027, from approximately 2.5% this year, supported by higher dividends from Petroliam Nasional Bhd (PETRONAS).
The national oil company is expected to contribute RM32 billion in dividends next year, compared with RM27 billion estimated for 2026.
BMI also expects the government to achieve its RM380.8 billion revenue target for 2027, representing a 4.7% increase from the revised RM363.3 billion estimated for this year.
It said resilient economic activity should support tax collections, particularly sales and service tax (SST), which accounted for approximately 18% of government revenue in the first half of 2026, compared with about 7.5% in 2009.
BMI forecasts Malaysia's economic growth to moderate to 4.5% in 2027 from 5.1% this year.
Separately, BMI flagged the possibility of additional fiscal pressures arising from El Niño, noting that a severe episode could disrupt agricultural production and necessitate further government assistance to the sector.
Budget 2027 does not provide an explicit allocation for El Niño-related measures, it noted.