The government could save up to RM9 billion this year and next from the recent gas price hike for the power sector and this would further improve Malaysia's fiscal deficit, Barclays Capital said.
"Malaysia's fiscal position also continues to improve, in our view," Barclays Capital said in its emerging markets report.
The government had announced that effective June 1, the average domestic electricity tariff will be increased from 27.39 sen per kWh to 28.63 sen per kWh but indicated that only 25 per cent of domestic consumers will be affected as those using less than 300kWh will be exempted from the increase until December.
In this regard, Barclays Capital said it is optimistic the country's fiscal deficit will be around 4.3 per cent for this year, against the government's forecast of 5.4 per cent.
Moreover, it said the government has explicitly stated that proceeds from the privatisation programme will be used to reduce the fiscal deficit.
On Tuesday, Performance Management and Delivery Unit chief executive officer Datuk Seri Idris Jala said 33 companies had been identified as ready for either complete or part privatisation over the next 12 to 18 months.
Barclays Capital said it continues to see the big privatisation drive as the key driver of ringgit gains over the next three to six months.
"We believe the newsflow has started to improve significantly for the ringgit and we maintain our positive view on the currency, expecting a faster pace of appreciation," it said.
Citing divestment itself is not a new theme, Barclays Capital said rather, the timing of a general election, which the bank says would occur as early as September.
"We expect more positive newsflow in the lead up to a general election, materialising in the way of IPO (initial public offering) announcements, iconic FDI (foreign direct investment) projects and a stronger ringgit.
"We maintain our forecast of RM2.90 per US dollar by year-end and RM2.84 per US dollar in 12 months," it said.
On its projection for the budget deficit, Barclays Capital said its forecast of a 4.3 per cent fiscal deficit suggests that gross borrowing via Malaysian Government Securities (MGS), domestic sukuk and sovereign bonds for 2011 will total RM92 billion.
"This is around RM10 billion lower than the number implied by the government's fiscal deficit projection of 5.4 per cent of gross domestic product.
"We expect second half issuance to be around RM36 billion, of which we expect RM18 billion to be in the form of MGS issued in the market, which is about RM7 billion lower than the first half," Barclays Capital said, adding it expects improving third supply conditions coupled with forex gains to keep offshore investors interested in longer-dated MGS.