Following the unveiling of Malaysia's Budget 2023 last Friday, Fitch Solutions on Tuesday maintained a fiscal deficit forecast for the country at 6.1 percent of gross domestic product (GDP) in 2022 and 5.6 percent of GDP in 2023.

"This implies that we expect the budget shortfall to come in wider than the government's latest projections for 2022, but roughly similar for 2023," the research house said in a statement.

With revenue projected to be at 272.6 billion ringgit (58.35 billion U.S. dollars) in 2023, the Malaysian government expects to register a budget deficit of 99.1 billion ringgit (21.21 billion dollars), equivalent to 5.5 percent of GDP, smaller than the revised deficit projection of 5.8 percent of GDP in 2022.

In 2022, Fitch Solutions expects the budget deficit to be slightly wider than the government's revised projections of 5.8 percent due to lower revenue and economic growth forecasts.

However, it noted that in January-August, the federal government collected 173.3 billion ringgit (37.09 billion dollars) in revenue, amounting to only 60.8 percent of its revised 2022 projection of 285.2 billion ringgit (61.04 billion dollars).

"This implies that the government expects revenue collection to pick up over the remaining course of the year. In contrast, we are forecasting revenue to reach just 252.5 billion ringgit (54.05 billion dollars) for 2022 given that commodity prices have peaked in June," it said.

According to the research house, it is also unlikely that Malaysia's state-owned oil and gas firm Petronas will announce additional dividend payouts to the government this year, after having already paid out a total of 50 billion ringgit (10.7 billion dollars) of dividends to the government in the year to August, which is one of the highest on record.

"Lastly, the government assumes real GDP growth of 6.5 percent to 7 percent in 2022, higher than our forecast of 5.8 percent," it said.

In 2023, Fitch Solutions expects the budget shortfall as a share of GDP to come in at 5.6 percent of GDP, broadly similar to the government's projection of 5.5 percent.

"That said, we note that risks to Malaysia's fiscal outlook are weighted to the downside as the bulk of the spending cuts will come from lower subsidies and social assistance, which the government projects to come in at 42 billion ringgit (8.99 billion dollars) in 2023, versus 58.9 billion ringgit (12.61 billion dollars) in 2022," it said.

"Furthermore, there is also a likelihood that the government's debt servicing expense in 2023 could exceed the budgeted increase of 7 percent given the fast-rising interest rate environment," it said.

In 2021, Malaysia's debt services charges increased by 10.4 percent, and the government expects this component to increase by 13.2 percent in 2022.

Already, the government's weighted average cost of borrowing has increased to 4.15 percent as of end-August, as compared with 3.70 percent a year ago.

Malaysia unveiled a budget of 372.3 billion ringgit (79.69 billion dollars) for 2023 last week. The budget has yet to be passed due to the dissolution of parliament announced by Prime Minister Ismail Sabri Yaakob on Monday.