Malaysia’s fiscal deficit set to shrink to 3.3% in 2027, finance ministry says

KUALA LUMPUR, 12 OCTOBER 2026 —

The Ministry of Finance has projected that Malaysia’s fiscal deficit will narrow to 3.3 per cent of gross domestic product (GDP) in 2027, a figure that marks the lowest level since 2017 when the ratio touched 2.9 per cent.

While the deficit-to-GDP ratio improves by 0.3 percentage points from the revised 2026 figure, the absolute spending gap remains elevated at RM77.5 billion, a decrease of only RM992 million, or 1.3 per cent, from the revised RM78.5 billion deficit recorded in 2026. The ministry emphasized that the pace and quality of this consolidation will remain calibrated to prevailing economic conditions, with fiscal adjustment anchored by sustainable revenue improvements and expenditure efficiency.

The narrowing of the deficit ratio is largely driven by headline economic expansion rather than a significant contraction in the absolute spending gap. In fact, the projected 2027 shortfall of RM77.5 billion is higher than the RM75.3 billion recorded in 2025, when the shortfall amounted to 3.7 per cent of GDP.

Despite this, the 3.3 per cent ratio represents a step toward the government’s medium-term target of guiding the deficit down towards 3 per cent of GDP between 2027 and 2029. The ministry noted that borrowing requirements will be contained through continued fiscal consolidation, thereby supporting a more sustainable financing profile and reinforcing the medium-term debt trajectory. This approach aims to preserve fiscal resilience while managing borrowing needs in line with actual financing requirements.

A significant factor influencing the fiscal position is the upward revision of proceeds from Petroliam Nasional Bhd’s dividend, which is expected to rise from RM20 billion to RM27 billion. This increase is in tandem with higher average global crude oil prices, providing an important fiscal buffer to accommodate additional expenditure pressures. Consequently, federal government revenue for 2026 is estimated to increase by 6 per cent to RM363.6 billion, compared to the initial estimate.

The ministry stated that this stronger revenue performance, coupled with expenditure reprioritisation, has helped contain the impact on the overall fiscal position despite external headwinds. The revision reflects the government’s calibrated response to navigating these challenges while maintaining stability in the broader economic framework.

The fiscal deficit for 2026 has been revised upwards to 3.6 per cent of GDP, compared with the original target of 3.5 per cent. This adjustment takes into account the fiscal implications arising from external shocks, specifically the prolonged war in West Asia and surging global energy prices.

The 2026 budget was initially premised on GDP growth of 4 per cent to 4.5 per cent, with crude oil prices assumed to be between US$60 and US$65 per barrel. However, higher crude oil prices and supply disruptions have pushed the national fuel subsidy bill to RM40 billion, a substantial increase from the originally budgeted RM15 billion.

The ministry described this modest revision as a reflection of the government’s measured approach in managing external pressures while ensuring that the overall fiscal position remains manageable.

Operating expenditure for 2026 is now projected to reach RM363.1 billion, which is 7.3 per cent above the original allocation, while development expenditure remains unchanged at RM81 billion. The increase in operating costs is primarily driven by the surge in fuel subsidies necessitated by global energy market volatility. To mitigate the fiscal impact of these higher costs, the government has undertaken expenditure reprioritisation.

This strategy involves shifting resources to essential areas while containing non-essential spending, thereby helping to offset the pressure on the budget. The ministry highlighted that these measures are crucial in maintaining the integrity of the fiscal framework despite the adverse external environment.

In addition to managing the deficit, the government has focused on supporting the private sector, particularly micro, small and medium enterprises (MSMEs). Over RM15 billion in financing support was made available to MSMEs in 2026. This includes RM5 billion through Syarikat Jaminan Pembiayaan Perniagaan Bhd, RM5 billion via the SME Stabilisation Relief Facility under Bank Negara Malaysia, and more than RM5 billion in microfinancing facilities channelled through various agencies and development financial institutions.

These efforts are designed to bolster business resilience and ensure that the private sector continues to contribute to economic growth. The ministry stated that greater private sector participation through public-private partnerships and co-investment arrangements will complement public financing for infrastructure, facilitating investment in areas with strong economic spillovers and long-term growth potential.

The medium-term fiscal framework projects cumulative federal government revenue of RM1.16 trillion over the three-year period from 2027 to 2029. This is set against RM1.15 trillion in operating expenditure and RM253 billion in gross development expenditure. The framework underscores the government’s commitment to a sustainable fiscal path, where revenue growth is matched by prudent expenditure management.

The ministry noted that the 2027 estimates do not factor in the impact of any new fiscal measures under Budget 2027, indicating that the current projections are based on existing policy settings and economic assumptions. This exclusion highlights the potential for further adjustments as new budgetary measures are introduced and implemented.

The reliance on higher oil prices and PN dividends introduces a degree of volatility into the fiscal outlook. While the upward revision of PN dividends to RM27 billion provides a buffer, it also ties the government’s revenue performance closely to global commodity markets. The ministry acknowledged that the pace of consolidation will remain calibrated to prevailing economic conditions, suggesting flexibility in the approach to fiscal adjustment.

This flexibility is intended to allow the government to respond to unexpected shocks without compromising the medium-term debt trajectory. The focus on sustainable revenue improvements and expenditure efficiency remains central to this strategy, ensuring that the fiscal position is not overly dependent on transient windfalls.

The increase in fuel subsidies to RM40 billion in 2026 represents a significant shift from the initial budgetary assumptions. This rise is a direct consequence of the prolonged war in West Asia and the resulting surge in global energy prices. The government’s decision to absorb these costs through expenditure reprioritisation demonstrates a commitment to protecting consumers from the full impact of global price spikes.

However, this also places additional pressure on the operating budget, necessitating careful management of other expenditure items. The ministry’s emphasis on containing borrowing requirements is a response to this pressure, aiming to prevent a rapid accumulation of debt that could undermine long-term fiscal sustainability.

The projected narrowing of the deficit to 3.3 per cent of GDP in 2027 is a key milestone in the government’s fiscal consolidation journey. It signals a return to lower deficit levels not seen since 2017, providing a sense of stability for markets and investors. The combination of higher revenue from PN dividends, controlled borrowing, and targeted support for the private sector forms the backbone of this strategy.

As the government moves forward, the focus will remain on maintaining this trajectory while adapting to any new economic challenges that may arise. The ministry’s commitment to a sustainable financing profile and medium-term debt trajectory underscores the importance of disciplined fiscal management in achieving long-term economic stability.

The release of the 2027 Fiscal Outlook and Federal Government Revenue Estimates provides a clear roadmap for the government’s fiscal strategy in the coming years. By projecting a deficit of 3.3 per cent of GDP and outlining the measures to achieve this, the ministry has set a benchmark for future performance.

The emphasis on private sector participation and public-private partnerships indicates a shift towards leveraging private capital for infrastructure development, reducing the burden on public funds. This approach is expected to facilitate investment in areas with strong economic spillovers, contributing to broader economic growth. The government’s ability to navigate external shocks while maintaining fiscal discipline will be critical in achieving its medium-term targets and ensuring a resilient economic future.