KUALA LUMPUR, BMI, a Fitch Solutions company, has maintained its forecast for Malaysia’s federal government budget deficit to narrow from 5.0 per cent of gross domestic product (GDP) in 2023 to 4.3 per cent in 2024, and further to 3.9 per cent in 2025.

The research firm noted that, thus far in 2024, the unity government has made significant strides in controlling spending.

It expressed confidence that the government would continue working towards its medium-term goal of reducing the budget deficit to 3.5 per cent of GDP by 2025.

‘Meanwhile, we continue to expect that expenditure will remain on track with the government’s projections,” BMI said in a note today.

It further noted that total spending had reached 56.0 per cent of the 2024 target in the first seven months, aligning with the five-year average of 55.0 per cent.

“Since our April update, the unity government removed blanket diesel subsidies on June 10, a move expected to save up to RM4.0 billion annually.

“We see this as necessary, given that ci
vil servants’ salaries will increase by more than RM10.0 billion, marking the first revision in over a decade,” the firm explained.

BMI expects further subsidy rationalisation to meet fiscal targets, maintaining its forecast for expenditure to decline marginally to 19.4 per cent of GDP in 2024, down from 20.3 per cent in 2023.

In addition, BMI highlighted that under the medium-term fiscal framework for 2024-2026, which targets an average deficit of 3.5 per cent of GDP, the Fiscal Responsibility Act, passed on Oct 11, 2023, mandates the government to reduce the deficit to below 3.0 per cent within three to five years.

‘If so, we expect more substantial measures to be implemented in the upcoming Budget 2025 to achieve these medium-term targets,’ it said.

Regarding the overnight policy rate (OPR), BMI expects Bank Negara Malaysia (BNM) to maintain the rate at 3.00 per cent for the remainder of 2024 and throughout 2025, with a potential cut in 2026.

‘Benign inflation and a robust growth outlook suggest that
the BNM can afford to leave the OPR at its current level for a prolonged period,’ it added.

Source: BERNAMA News Agency