THE federal government is set to reduce its budget deficit to 3.8% of its Gross Domestic Product (GDP) in 2025, according to a new forecast by Fitch Solutions’ BMI.
This marks a slight improvement from the 4.1% deficit expected for 2024, as the government continues to implement fiscal consolidation measures.
BMI’s report, released today, reaffirms its confidence in Malaysia’s fiscal trajectory, citing the government’s consistent track record in meeting fiscal targets and aligning with the country’s own projections.
"The budget indicates a positive step towards Malaysia's medium-term goal of reducing its budget deficit to an average of 3.5% between 2025 and 2027," said BMI in a research note. The government’s continued fiscal tightening efforts, along with a growing tax base, are key drivers of the projected reduction in the deficit.
Despite the positive outlook, BMI has raised concerns about potential risks that could derail Malaysia’s fiscal plans, particularly in the face of new tariffs imposed by the administration of former US President Donald Trump.
The 24% reciprocal tariff on all Malaysian imports to the United States could significantly impact the Malaysian export-driven economy.
"The expected results will depend on the success of negotiations between both sides to reduce tariffs," BMI cautioned, noting that any prolonged trade disruptions could lead to a larger-than-expected deficit.
BMI also forecasts a slight slowdown in revenue growth, predicting it will dip to 16.3% of GDP in 2025, down from 16.6% in 2024.
Key budgetary measures to offset the decline include expanding the scope of the Sales and Service Tax (SST) to include business-to-business (B2B) commercial services, non-essential food items, and premium imports like salmon and avocados.
BMI estimates these new measures could generate approximately RM51.7 billion, or 2.2% of GDP, which will help balance the anticipated drop in petroleum-related revenues.
Petroleum income is projected to fall to 3% of GDP in 2025, down from 3.2% in 2024, as global oil prices are expected to average between USD 75 and USD 80 per barrel.
This aligns with the government's broader goal to reduce reliance on oil revenue, a shift that is expected to be gradual.
Further revenue-boosting initiatives include the introduction of a 2% tax on dividend income exceeding RM100,000, starting from the 2025 tax year. BMI expects the government to meet its revenue targets as it has consistently done in recent years.
However, BMI acknowledges that while total government expenditure may exceed budget estimates, the gap between budgeted and actual spending has been narrowing since 2022. For 2025, overall expenditure is expected to decrease to 20.1% of GDP, from 20.9% in 2024.
One of the most significant potential sources of savings is the planned reduction of subsidies for RON95 petrol, which is expected to save around RM20 billion.
However, BMI noted that the details surrounding this plan remain unclear, raising questions about its implementation and effectiveness.
The government’s public debt is expected to remain high, rising to RM1.23 trillion by the end of 2024, or around 63% of GDP, up from RM1.17 trillion at the end of 2023.
Despite this, BMI believes the country’s fiscal risks remain manageable, particularly since more than 97% of Malaysia’s debt is in ringgit-denominated securities. - April 9, 2025
