However, it sees a downside risk to the government’s optimistic revenue projections.

Fitch, which affirmed Malaysia’s sovereign rating at ‘A-‘ with a Stable Outlook in August 2017, said in a statement that Malaysia was unlikely to miss its fiscal deficit target to the extent that it would knock the government off its deficit reduction path next year.

“The medium-term target of achieving a near-balanced budget by 2020 would require a step-up in consolidation efforts in 2019 and 2020, but is not unattainable. We expect the fiscal deficit to continue narrowing over the next few years and project federal government debt – which was 50.9% of GDP in June 2017 – to remain on a downward path and therefore stay below the authorities’ 55% self-imposed debt ceiling, but slightly above the 49% ‘A’ median.

It noted that Budget 2018 had set a deficit target of 2.8% of GDP, a slight reduction from the government’s projected outcome of 3.0% in 2017.

Operating expenditure is set to rise by 6.5%, including a large support package for the rural sector and pay-outs to public-sector workers and pensioners. The income tax rate will also be cut by 2 percentage points for middle-income workers.

The government expects these measures to be more than offset by a revenue boost from an improvement in economic conditions and oil prices and tax administration efforts, as well as a stabilisation of development spending following a strong increase to fund infrastructure projects in 2017.

Fitch said infrastructure spending might continue to rise, with a corresponding increase in contingent liabilities.

“We see downside risk to the government’s optimistic revenue projections. Its 2018 GDP growth forecast of 5.0%-5.5% assumes that strong recent momentum will be maintained, but there could be some headwinds from cooling external demand.

“The government’s upbeat growth forecast and optimistic revenue collection targets are key to its expectation that direct tax collection will increase by around 7.0% and GST revenue will rise by 5.5%. Shortfalls in revenue collection would most likely be offset by corresponding expenditure cuts to meet the deficit target. “

Fitch noted that Malaysia’s government revenue remained sensitive to oil price movements, and that the government had forecast dividends from Petronas to total RM16 billion in 2017 – up from an initially budgeted RM13 billion – and to rise to RM19 billion in 2018.

“This assumes the crude oil price will rise to US$52/barrel in 2018, up from US$50 in 2017, which is broadly in line with our own expectation.”