KUALA LUMPUR, Sept 25 — Oversea-Chinese Banking Corporation Ltd (OCBC Bank) expects a modest “fiscal slippage” of 0.1 per cent of gross domestic product (GDP) in 2026 for Malaysia, with its fiscal deficit forecast for the country at 3.6 per cent of GDP versus the budgeted 3.5 per cent.
The larger-than-expected subsidy and social assistance bill would more than offset better revenue collections and higher Petronas dividends.
Revenues rose 14 per cent year-on-year (y-o-y) in the first seven months of 2026, while expenditures increased 11.2 per cent. The fiscal deficit was tracking at 3.6 per cent of GDP on a 12-month rolling sum basis.
Meanwhile, rising political uncertainty ahead of Budget 2027, coupled with persistent external volatility and elevated oil prices, could make fiscal consolidation challenging.
"While we expect the government to announce a narrower fiscal deficit, it remains to be seen if this deficit can be achieved. Our baseline is for a more stable fiscal deficit at 3.6 per cent of GDP in 2027," it said in its Global Markets research note today.
OCBC Bank expects the government to project a narrower fiscal deficit of 3.4 per cent of GDP in 2027, but this would still be above the 3.2 per cent level implied under the Medium-Term Fiscal Framework (MTFF) 2026-2028. It also expects government expenditure growth to moderate to 3.5 and 4.0 per cent in 2027, but does not anticipate any material subsidy rationalisation next year.
"If global oil prices persist at current levels of US$100 per barrel, the fuel subsidy bill would remain elevated at 1.7-1.8 per cent of GDP," it said.
OCBC Bank noted that Budget 2026 was based on an average Brent crude oil price of US$60-65 per barrel, while the MTFF assumed US$70 per barrel. Based on the Finance Ministry’s sensitivity estimates, the US$40-per-barrel difference from the Budget 2026 assumption alone could add RM16-20 billion in subsidy spending.
Malaysia’s expenditure pressures would remain elevated, with limited room to reduce major spending categories such as emoluments, pensions, and debt service charges. On the revenue side, it expects growth to moderate to around seven per cent in 2027, supported mainly by improvements in tax administration.
"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," it said.
