Key Points
- The 2026 budget, the first under the 13th Malaysia Plan (RMK-13), underscores the government’s commitment to fiscal consolidation, targeting a deficit of 3.5% of GDP with a medium-term goal of 3% by 2030. It allocates RM419.2bn in spending for 2026, only a 1.7% rise from 2025, with a notable 14% reduction to subsidies and social assistance. But to support strategic investments, national resources from government-linked companies will be mobilised, bringing total public expenditure to RM470bn, nearly 4% higher than in 2025. This strategy will help support economic progress while keeping fiscal consolidation on track.
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Major fiscal reforms will help anchor market expectations of fiscal sustainability, with sovereign credit risk relatively contained. Key measures include shifting from blanket subsidies to targeted schemes, most recently excluding foreigners from RON95 fuel subsidies, saving at least RM2.5bn. Along with other targeted measures earlier implemented, total subsidy savings could reach RM15.5bn in 2026. A broader sales and services tax (SST) base is expected to add around RM10bn to revenues, partially offsetting declines in petroleum-related revenues (-RM13.6bn). Deficit financing will further narrow, with a medium-term goal of reducing government debt-to-GDP below 60%.
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Several budget initiatives reflect a pro-growth fiscal stance that could help offset trade headwinds and support investor sentiment. Sectors including electrical and electronics (E&E), construction, renewables, and consumer sectors could be potential beneficiaries. Indeed, significant allocations target high-growth, high-value sectors such as E&E, renewables, and digital technology, aiming to catalyse a globally competitive E&E ecosystem and attract foreign direct investment. Major infrastructure investments remain focused on enhancing regional connectivity in Sabah and Sarawak, while over RM700mn will support tourism under the “Visit Malaysia 2026” campaign.
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The government’s fiscal discipline and a decline in borrowing needs will help anchor market confidence, supporting demand for Malaysian government securities. But further yield compression across the curve could be modest, given our expectations for BNM to keep rates at 2.75% in 2026 and following the bond rally that began in November 2024. We forecast Malaysia’s 10-year government bond yield to fall to 3.30% by end-2026 from 3.49% currently. Meanwhile, we remain mildly positive on the ringgit, forecasting USDMYR to decline to 4.05 by end-2026, supported by fiscal reforms, strong domestic-led investment outlook, and narrowing yield differentials with US.
