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Key Points

• Giving back without giving up fiscal consolidation. Budget 2027 lowers the fiscal deficit to 3.3% of GDP from an estimated 3.6% in 2026, despite continued support to cushion households from elevated energy prices. Stronger revenues and earlier fiscal reforms are creating room for tax relief and SME support without derailing fiscal repair. The primary deficit also narrows to 0.7% of GDP from 1.0%.

• Fiscal repair increasingly matters for debt dynamics, not just the deficit target. Federal debt stood at 63.1% of GDP at end-June 2026 and is overwhelmingly ringgit-denominated. The effective cost of government debt remains around 4%, but debt servicing already absorbs around 16% of central government revenue. Slower debt accumulation is therefore important to protect future fiscal space for productive spending.

• We see the rise in Malaysian yields as primarily externally driven. Malaysia retains a benign domestic backdrop of contained inflation, fiscal consolidation and deep local demand for government bonds. In our view, this creates opportunities to receive MYR rates when the domestic curve is dragged higher by the US rates sell-off, particularly where market pricing embeds more tightening or term premium than Malaysia's domestic fundamentals justify.

• Budget 2027 raises the floor while continuing to raise the ceiling. Tax cuts, reliefs and transfers cushion disposable incomes, while higher development spending, grid investment, technology incentives, GEAR-uP investment and support for advanced manufacturing seek to turn Malaysia's investment boom into higher productivity and real wages.

• Market view: constructive MGS and MYR, selective equities. We favour receiving MYR rates on externally driven sell offs and remain constructive on MYR over the medium term. Equity benefits could be concentrated in infrastructure, utilities, technology, financial services, tourism, and domestic consumption rather than being uniform across the market.