“Malaysia’s budget gap will narrow to 4% of gross domestic product (GDP) from 4.1% last year,” BMI said in a report.

“That misses the official target of 3.8% of GDP and will delay policymakers’ goal of bringing down the deficit to 3% by 2028,” it added.

A failure to meet the target would be a setback for Malaysia, which has the highest credit rating among developing nations in Southeast Asia.

On July 8, S&P Global Ratings warned that tariffs and trade wars have increased risks for Asia-Pacific sovereign ratings.

BMI forecasted revenue to amount to 16.4% of GDP in 2025, down from 16.8% in 2024, as subdued economic activity limits tax collection.

BMI has predicted that economic growth will moderate to 4.2% this year.

“That compares with the official forecast of 4.5% to 5.5% economic growth, which is under review.

“Petroleum-related revenue is also expected to undershoot the budget,” it said.

The government will see more pressure to further subsidise utility costs following the 14% increase in electricity tariffs that took effect July 1, according to BMI.

“There have also been scant details about the government’s plans to cut subsidies for RON95, the country’s most popular gasoline,” it noted.

“We suspect policymakers will overshoot planned expenditure in 2025, as they have consistently done so in recent years,” it said.