HLIB: Fiscal deficit to narrow to 3.8pct in 20225

New Straits Times

26-06-2025

KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB) expects the fiscal deficit to be narrowed to 3.8 per cent this year (2024: -4.1 per cent), as announced in Budget 2025.
In its Economics & Strategy Outlook for the second half of 2025 (2H 2025), it noted that the government is expected to raise its total expenditure by 3.8 per cent year-on-year (y-o-y) to RM421.0 billion (2024: RM405.5 billion) amid higher emoluments and retirement charges due to the rise in civil servant salary and pension scheme, as well as rising debt service charges.
Meanwhile, total revenue is expected to increase by 4.7 per cent y-o-y to RM339.7 billion (2024: RM324.6 billion) due to higher tax collection as a result of economic activity expansion.
Following the United States President Donald Trump's tariff measures, the investment bank said the global economy is expected to be more modest, with negative implications for Malaysia.
While the official forecast has yet to be revised, officials have hinted at lowering the gross domestic product (GDP) forecast from the current projection of 4.5-5.5 per cent, pending further clarity on trade negotiations.
"While a more cautious outlook may lead to lower GDP and, in turn, lower-than-expected direct tax revenue, this is expected to be partially offset by subsidy savings from lower global oil prices and a stronger ringgit," it stated.
Simultaneously, the government remains committed to implementing its fiscal reform measures in its bid to broaden the tax base.
On June 9, the government announced that the implementation of the expanded Sales and Service Tax (SST) will take effect on July 1, 2025, with the Service Tax (six per cent or eight per cent) broadened to cover additional service categories, including rental or leasing, construction, financial services, private healthcare, private education and beauty services.
To minimise the impact, the government has introduced several reliefs and facilitative measures.
It aims to increase fiscal revenue by RM5 billion (0.24 per cent of GDP) with an annual target of RM10 billion per year.
"Other measures, such as the gradual implementation of e-invoicing, are also expected to enhance government revenue over the longer term.
"The government also aims to rationalise the RON95 petrol in 2H 2025, which will potentially provide government savings of RM8 billion as well as target smuggling activities," it said.
On the inflation front, HLIB expects both headline and core inflation to remain modest in 2025, reflecting stable demand conditions and benign inflationary pressures.
The outlook, while dependent on global developments and changes to domestic policy on subsidies, is expected to remain modest due to the targeted nature of policy reforms.
According to Bank Negara Malaysia, the committee expects inflation to remain manageable. BNM has estimated a headline inflation rate of 2.0-3.5 per cent for 2025 was already factored in the impact of policy adjustments, including the potential subsidy rationalisation.
Meanwhile, HLIB has forecast the ringgit to strengthen to an average 2025 of RM4.35-RM4.10 against the US dollar (2024: 4.57/4.47).
Typically, a strong ringgit expectation would encourage foreign fund flows into Malaysia.
"Not forgetting, our country has many other allures, making Malaysia an attractive emerging market rotational play," it said.
Heading into 2H 2025, HLIB said the performance of the FBM KLCI will remain largely driven by external factors, particularly ongoing tensions in the Middle East and developments in the US.
"Therefore, we are maintaining our 2025 KLCI target at 1,640. Overall, we expect 2H 2025 to be a period of contrasts, with the 3Q 2025 likely to be volatile, followed by a more stable 4Q. As such, we view any market pullback as a buying opportunity, especially for high-beta stocks," it said.