Budget 2025 Maintains Gradual Fiscal Consolidation Approach - Fitch Ratings

KUALA LUMPUR, Oct 29 (Bernama) -- Malaysia’s Budget 2025 reaffirms a commitment towards gradual fiscal consolidation from a high debt level compared with peers, according to Fitch Ratings. 

The budget projects a deficit of 3.8 per cent of gross domestic product (GDP) in 2025 excluding new budget measures, down from an estimated 4.3 per cent in 2024, said the credit rating agency in a statement today. 

"These figures align Fitch’s assumptions when we affirmed Malaysia’s rating at 'BBB+' with a Stable Outlook in June 2024," it said.

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The budget also reiterated the Public Finance and Fiscal Responsibility Act’s (FRA) target to reduce the deficit to 3.0 per cent of GDP and federal government debt to below 60 per cent of GDP in the medium term, though no specific timeline was provided.

It noted that federal government debt stood at 63.1 per cent of GDP as of end-June 2024, and the medium-term fiscal framework projects deficits would average 3.5 per cent of GDP over 2025-2027.

Meanwhile, the government projects revenue collection in 2025 would be equivalent to 16.3 per cent of GDP in 2025, from 16.5 per cent in 2024. 

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"This partly reflects a weaker contribution from petroleum-related revenues," it noted. 

Fitch's baseline projection for Brent oil prices in 2025, at US$70 per barrel (bbl), falls below the bottom of the government’s projected range of US$75-US$80/bbl, pointing to additional downside risks to revenue, it said.

Additionally, Fitch views the net effect of new revenue-raising measures as relatively small.

The measures include a 2.0 per cent tax on individual dividend income, higher excise duties on sugary drinks, and adjustments to the sales and service tax to expand its scope and make it more progressive. 

The subsidies rationalisation may have positive macroeconomic effects at the margin if fiscal reforms have the net effect of channelling more resources to the less wealthy sections of the population that have a higher propensity to spend, it said. 

The budget projects that expenditure would fall to 20.2 per cent of GDP in 2025, from 20.9 per cent in 2024, as the government continues to reform Malaysia’s subsidy regime to reduce subsidies for higher-income groups. 

The decision to channel a large share of savings from subsidy reform to additional spending, including increased social assistance for lower-income groups and higher wages for civil servants, would contribute to a relatively slow pace of debt reduction. 

Fitch projects that Malaysia’s general government debt or GDP will fall from 76.7 per cent in 2023 to 73.7 per cent in 2026. 

"This will remain significantly higher than the median for 'BBB' category sovereigns of 59.1 per cent in 2026, though an upward trend in the median debt level means that the gap between Malaysia and its peers narrows over 2024-2026. 

"Positive fiscal surprises that lead to a faster reduction in debt or GDP than we expect could put upward pressure on Malaysia’s rating," it concluded. 

-- BERNAMA