Malaysia's fiscal deficit seen narrowing in 2027: JP Morgan

KUALA LUMPUR: According to JP Morgan, Malaysia's fiscal deficit is projected to decrease to 3.4% of GDP in 2027, down from the current 3.5% estimate for the year. The bank attributes this expectation to the government's efforts to balance short-term support measures with medium-term fiscal constraints, which include higher oil prices, rising debt servicing costs, and a high starting level of public debt.

Over the past few years, the government has reduced the deficit from 6.4% of GDP in 2021 to 3.7% in 2025 through a combination of revenue-enhancing and expenditure-reducing measures. JP Morgan anticipates that the 2027 budget will prioritize reallocation of spending rather than expansion, with potential savings stemming from a lower subsidy bill due to anticipated lower oil prices.

The government's pre-budget statement indicates that the 2027 budget will focus on addressing cost-of-living pressures through existing cash transfer and subsidy frameworks, while maintaining fiscal discipline. This could lead to further moderation in development expenditure from the 3.7% of GDP projected for 2026 as revenues are directed towards household support measures and debt servicing.

The firm also notes that fiscal pressures have eased since April, but have not disappeared entirely. The government had initially allocated RM15 billion for fuel subsidies in 2026, but now expects outlays to reach RM40 billion, a RM25 billion increase from April's projection. Part of this excess subsidy bill should be offset by stronger-than-budgeted revenues, such as higher petroleum-related tax receipts and royalties.

Even with a modest RM2 billion-3 billion overshoot in the nominal deficit, the fiscal deficit is expected to meet the government's 3.5% of GDP target, albeit with some residual shortfall necessitating additional revenue-mobilizing measures, like a special dividend from Petroliam Nasional Bhd, to achieve the target.