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KUALA LUMPUR (Oct 13): Malaysia’s generous spending on subsidies and support for households and businesses will continue to drag on the pace of fiscal consolidation, said Fitch Ratings.
The latest fiscal framework implies a “gradual consolidation path” towards narrowing the budget deficit, as a percentage of economic output, to 3% by 2028, the rating agency said in a post-budget statement. Malaysia’s projected deficit is 3.5% for 2026 and 3.3% in 2027.
“Achieving this will depend on revenue delivery and more efficient subsidy mechanisms, which could become more challenging if oil prices remain high or social spending pressures persist, particularly as the general election approaches,” Fitch Ratings said.
Malaysia has been distributing more cash to cushion the pain from subsidy rationalisation and help the poorest cope with rising cost of living. The total allocation for subsidies, aid, and incentives for 2027 will exceed RM80 billion, including RM40 billion to cap fuel prices.
Prime Minister Datuk Seri Anwar Ibrahim also announced tax cuts for individuals and small businesses, on top of various reliefs and incentives.
Nevertheless, government debt should continue to decline gradually to around 74% of gross domestic product (GDP) in 2027, supported by economic growth and planned deficit reduction, Fitch Ratings said.
However, “this remains substantially above” the BBB median of 57.4%, the agency said, noting that its debt measure includes committed guarantees, which is estimated at 11.4% of GDP in 2026.
A sustained decline in government debt to GDP towards peer medians, supported by fiscal consolidation or strong growth prospects, could put upward pressure on Malaysia’s rating, the agency flagged.
Fitch Ratings affirmed Malaysia at BBB+ in December 2025 while S&P maintained its A- sovereign rating in September this year. Moody's held it at A3 in July. All three ratings are investment grade and carry stable outlooks.