OCBC sees Malaysia’s fiscal deficit at 3.6% of GDP in 2026 and 2027

KUALA LUMPUR, 28 SEPTEMBER 2026 —

Kuala Lumpur – Oversea‑Chinese Banking Corporation Ltd (OCBC Bank) projects Malaysia’s overall fiscal deficit will widen to 3.6 % of gross domestic product (GDP) in both 2026 and 2027, a modest “fiscal slippage” of 0.1 percentage point above the government’s 2026 budget target of 3.5 %, the bank said in a Global Markets research note released on Thursday.

OCBC’s analysis shows that revenue in the first seven months of 2026 rose 14 % year‑on‑year, while total government outlays increased 11.2 % over the same period. On a rolling 12‑month basis the deficit is already tracking at 3.6 % of GDP, the bank said, indicating a “fiscal slippage” of 0.1 % relative to the budgeted figure.

The bank added that the higher deficit reflects the impact of a subsidy and social‑assistance package that exceeds the budget’s original assumptions, even as tax receipts and Petronas dividend income have improved.

The research note warned that rising political uncertainty ahead of the 2027 budget, together with persistent external volatility and elevated oil prices, could make fiscal consolidation more challenging. 6 % of GDP in 2027. The bank expects the government to target a narrower 3.4 % deficit that year, but said this would still sit above the 3.2 % level implied under the Medium‑Term Fiscal Framework (MTFF) for 2026‑2028.

A key driver of the higher deficit, OCBC said, is the fuel‑subsidy bill, which it expects to remain elevated at 1.7‑1.8 % of GDP in 2027. The bank highlighted that Budget 2026 was built on an average Brent crude price of US$60‑65 per barrel, whereas the MTFF assumes US$70 per barrel.

Using the Finance Ministry’s own sensitivity estimates, OCBC calculated that the US$40‑per‑barrel gap between the budget assumption and the MTFF benchmark could translate into an additional RM16‑20 billion in subsidy spending for the year.

Expenditure pressures, the note added, are likely to stay high because there is limited room to trim major spending categories such as civil‑service emoluments, public‑sector pensions and debt‑service charges. On the revenue side, OCBC expects growth to moderate to around 7 % in 2027, driven mainly by improvements in tax administration rather than sweeping tax reforms.

“Limited subsidy policy changes, a focus on reining in cost‑of‑living conditions, while still supporting medium‑term projects, suggests that expenditures would stay elevated while tax administration improvements are more likely than ‘big‑bang’ reforms to support revenue generation,” the bank wrote.

OCBC’s baseline also assumes that government expenditure growth will ease to a range of 3.5‑4.0 % in 2027, but the bank does not anticipate any material subsidy rationalisation in the next fiscal year. The note underscored that, despite the modest fiscal slippage, the combination of higher subsidy outlays, constrained spending cuts and a slowdown in revenue growth could keep the deficit above the MTFF target, thereby limiting fiscal flexibility for future policy initiatives.

The bank concluded that, given the current trajectory, the government will need to balance the twin objectives of containing cost‑of‑living pressures for households and maintaining funding for medium‑term development projects.

The research note did not specify any immediate policy actions, but its projections set a benchmark against which the upcoming Budget 2027 will be measured, and they provide market participants with a clearer picture of the fiscal headwinds that could shape Malaysia’s economic outlook over the next two years.

Related: OCBC Bank · Finance Ministry · Kuala Lumpur