It could become more challenging to narrow the budget deficit “if oil prices remain high or social spending pressures persist, particularly as the general election approaches”, said Fitch Ratings.
KUALA LUMPUR (Oct 13): Credit rating agencies have flagged Budget 2027’s lack of measures to broaden the government’s revenue base while high oil prices could hamper efforts to reduce public debt.
RAM Rating Services Bhd noted that various tax reliefs would likely trim collections by RM2.96 billion.
“Budget 2027 could have taken more meaningful steps to broaden the revenue base and accelerate much-needed revenue reforms”, the agency said in a statement on Tuesday.
Malaysia’s tax collection as a share of the economy is 12.8%, which is lower than neighbouring Thailand and the Philippines’ above 14%, and the Organisation for Economic Cooperation and Development average of around 15.7%, RAM Ratings noted.
“The tax coverage for Malaysia is low, implying room for reforms to create more durable revenue streams and rebuild fiscal space over time,” it added.
This comes at a time when elevated fuel prices are expected to continue restricting Malaysia’s fiscal space.
The subsidies and social assistance bill for 2027 is expected to higher than 2025's RM55.3 billion, Malaysian Rating Corp Bhd (MARC) said.
Fuel subsidies, in particular, are expected to remain around RM40 billion, above normalised levels of around RM20 billion.
The government expects Brent crude oil to average US$85 per barrel next year, the same as its revised assumption for this year, RAM noted.
“Over the longer term, subsidy spending without targeted measures may not be sustainable, trading off against fiscal consolidation,” RAM said.
Subsidies and social assistance are among the big-ticket operating expenditure (opex) items eating into the government's fiscal space.
Elevated energy prices and the risk of higher funding costs may complicate Malaysia’s efforts to optimise public finances, MARC noted.
The deficit is targeted to decline to 3.3% of GDP in 2027, from 3.6% in 2026, but this translates into a marginal RM1 billion reduction, the credit rating agency said.
“Much of the improvement in the deficit-to-GDP ratio reflects nominal GDP expansion rather than a reduction in the deficit,” it said, adding that the favourable effect on fiscal deficit may fade as economic growth normalises.
RAM Ratings, meanwhile, noted that Malaysia’s debt trajectory has yet to see a “meaningful improvement” to below 60% of GDP, a cap by 2030 stipulated under the Fiscal Responsibility Act 2023 (FRA).
The government's debt stood at 63.1% of GDP by end-June 2026, expected to rise to 64% at end-2026, and is projected to log a slight improvement to 63.7% of GDP by end-2027, RAM Ratings said.
Beyond fiscal considerations, RAM Ratings called for careful implementation of the government’s planned tiered minimum wage.
The government's planned hike of the minimum wage to RM2,000 for unskilled labour, and RM2,500 for graduates and semi-skilled workers could add to business cost pressures, RAM Ratings noted.
“A higher starting wage for fresh graduates could potentially change their employment opportunities, depending on how the workers’ income framework is implemented. Close to a third of employed graduates (around 1.6 million workers) faced skill-related underemployment in 2024, indicating that many worked in semi-skilled or low-skilled jobs,” it said.
“If this wage increase is accompanied by relevant support towards upskilling technology transformations, it could encourage businesses over time to invest in productivity enhancements and create skilled job opportunities, rather than continue relying predominantly on low-skilled labour,” it added.