A smaller deficit in Budget 2026 and benign inflation outlook will be positive for Malaysian government bond prices, said DBS.
Net government borrowings are expected to be lower, the Singapore-based bank said, noting that both sides of the ledger would benefit from ongoing fiscal reforms extending into 2026 supported by an expanded sales and service tax as well as reduction in subsidies and social assistance outlays.
Inflation, meanwhile, remains manageable with a “calibrated approach” that balances subsidy cuts with the impact on costs of living at a time of benign global cost conditions, DBS said.
Last Friday, the government tabled a spending plan totaling RM419 billion next year. The budget deficit, which means the government spends more than it earns, is expected to narrow to 3.5% of economic output in 2026, according to the Ministry of Finance.
The statutory debt, which excludes offshore borrowings, has reached 63.6% of gross domestic product as of June 2025. Under its fiscal laws, the government has to keep its outstanding statutory debt under 65% of the total value of goods and services produced in the country.
Statutory debt comprises Malaysian Government Securities (MGS) and its Islamic counterpart Government Investment Issues as well as shorter-term Malaysian Islamic Treasury Bills.
The muted inflation and prospects for lower net government borrowings due to a smaller fiscal deficit should “anchor MGS yields with a downward bias,” DBS said.
Bond yields and prices move inversely.
The yield on the benchmark 10-year MGS is off its August lows, but is still down 33 basis points, or 0.33 percentage point, so far this year.