Malaysia faces a risk of missing its fiscal deficit target for 2026 due to mounting pressures from subsidy costs, according to government officials and analysts. The government had set a deficit target of 3.5% of gross domestic product (GDP) for 2026, but rising global commodity prices have increased the cost of fuel and food subsidies, straining the budget.
Finance Minister Tengku Zafrul Aziz stated in a recent briefing that the government is monitoring the situation closely and may need to adjust spending or implement targeted subsidies to stay within the fiscal framework. He noted that subsidy expenditures could exceed initial estimates by up to 10% if global prices remain elevated.
Economists at Maybank Investment Bank and other institutions have revised their deficit forecasts, with some predicting the deficit could widen to 4.0% of GDP if subsidy costs are not contained. The government has already implemented some measures, such as a fuel subsidy rationalization plan for high-income earners, but full implementation has been delayed.
The fiscal challenge comes as Malaysia seeks to balance economic growth with fiscal consolidation. The country's debt-to-GDP ratio stood at 62.3% as of end-2025, near the statutory limit of 65%. Any deviation from the deficit target could affect Malaysia's credit rating outlook, which is currently rated A3 by Moody's and A- by Fitch.
