The continued fiscal consolidation stance in the 2017 budget is positive given the challenging growth conditions, and underlines the government's strong intent to maintain fiscal prudence, said Standard Chartered Global Research.

"The government set the 2017 fiscal deficit at 3.0 percent of Gross Domestic Product (GDP), down a touch from 3.1 percent in 2016.

"The modest decline is in line with our expectations," the research house said in a note.

It said the absolute fiscal deficit rose slightly to RM40.3 billion from RM38.7 billion in 2016, and this small increase is not a concern.

On the credit side, rating agencies have lowered their assessment of Malaysia's credit strength on a few sub-rating parameters in 2016, thus the 2017 budget is likely to keep them cautious given the focus on social spending, it said.

The government is also increasing its 1Malaysia People’s Aid (BR1M) scheme to RM6.8 billion from RM5.9 billion, in line with its pledges to support lower-income households.

This would increase BR1M to more than 3.0 percent of current expenditure.

While the measures introduced to mitigate housing costs will help with affordability issues, the household leverage is still high.

Meanwhile, it said, subsidies, which would be reduced to RM22.4 billion from RM24.6 billion, are an encouraging trend.

From 4.5 percent of GDP in 2012, subsidy spending will fall to around 1.7 percent of GDP in 2017.

The government projects a rise of 3.3 percent in total revenue in 2017, and tax revenue is projected to grow by 8.1 percent despite the soft growth outlook, while Goods and Services Tax (GST) collections are projected to rise to RM40 billion from RM38.5 billion.

"We believe the budget announcement is neutral for the rates market in the medium term, although gross supply may increase modestly due to higher Malaysian Government Securities (MGS) redemptions," it said.

- Bernama