FitchRatings has affirmed Malaysia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook.
Among the Key Rating Drivers
Rating Strengths and Weaknesses: Malaysia’s ratings balance a diversified economy with strong medium-term growth prospects against high public debt, a low revenue base relative to current expenditure, and political considerations that may hinder long-term policymaking and reform implementation.
Robust Domestic Demand Driving Growth: Fitch said it expects GDP growth to rebound to 4.4% in 2024 and 4.5% in 2025, up from 3.6% in 2023, on resilient domestic demand and investments in the manufacturing sector. Private consumption will benefit from favorable labor market conditions, cash assistance programs and retirement fund withdrawals. Manufacturing output and exports are expected to grow with a recovery in external demand for electronics, though risks such as higher-for-longer global interest rates, geopolitical conflicts, and trade tensions could pose challenges.
Gradual Fiscal Consolidation: Fitch said it expects a federal government deficit of 4.3% of GDP in 2024. Budget flexibility is relatively limited, with the vast majority of current expenditure (about 17% of GDP in 2023) allocated to salaries, pensions, debt servicing, subsidies and social assistance. Targeted diesel subsidies started in June 2024, following electricity subsidy reductions since 2023, while plans for liberalising petrol pump prices have yet to be announced. Subsidy rationalisation should yield savings of about 0.5% of GDP in 2024, with part of it channelled to cash assistance for low-income groups.
The ratings agency forecasts that the federal government deficit will decline to 3.7% in 2025 and further to 3.4% of GDP in 2026. Near-term fiscal consolidation will be driven by continued subsidy reform and modest tax increases. However, higher inflation than expected could pressure the government to increase social assistance spending or adjust the timing of subsidy cuts.
Limited Revenue Mobilisation: Medium-term non-petroleum revenue generating capacity will remain limited without substantial and durable revenue-raising measures, amid high and relatively rigid current expenditure. Despite improved political stability since 2022, we expect fiscal reforms such as the introduction of broad-based consumption taxes to be politically challenging in the near term, as the government balances interests within the ruling coalition and garners support from voters. Petroleum-related and non-petroleum revenues were about 4.2% and 13.1% of GDP, respectively, in 2023.
High Debt: Fitch expects a gradual fiscal consolidation path that leads to a modest decline in general government debt over the medium term. General government debt peaked at over 76% of GDP at end-2023 (‘BBB’ median: 55% of GDP), and we project a decline to 74% in 2026.
Fitch’s general government debt figures include committed guarantees —guaranteed loans taken by recipient entities receiving government financial assistance — which stood at about 12% of GDP at end-2023. The government guarantees another 5.6% of GDP of debt where it currently does not provide any support for debt servicing. Other contingent liabilities relate to public-private partnership projects, totalling 7.3% of GDP at the end of 2023.
Upside Inflation Risks: Price controls and subsidies have kept inflation in check, and we project it to remain broadly unchanged at 2.6% in 2024. Inflationary pressures from targeting diesel subsidies should be limited, as diesel accounts for only 0.2% of the CPI basket and subsidies will continue for fishermen, public transport, logistics and essential services vehicles. Nevertheless, upside risks on inflation could arise from uncertainty around future subsidy rationalisation plans.
Current Account in Surplus: Malaysia has recorded current account surpluses for more than two decades, and we expect this to continue in the medium term, despite near-term external challenges. We forecast the surplus to increase to 2.1% of GDP in 2024 and 2.4% of GDP in 2025, from 1.5% in 2023. The country’s diversified exports and competitive manufacturing sector help Malaysia to benefit from the global supply chain diversification. Foreign investment approvals gained pace in 2023, suggesting an increase in realised foreign investment for 2024.
Net Reserves to Recover: Gross official reserves were USD114 billion at end-May 2024, covering about 4.5 months of current account payments. Net short forward positions amounted to almost a quarter of gross official reserves, as a result of Bank Negara Malaysia’s interventions in the foreign-exchange market to manage ringgit liquidity. We expect the negative factors driving the ringgit depreciation, including negative interest-rate differentials, lower exports and portfolio investor sentiment, to wind down in 2H24, supporting a gradual recovery in net international reserves in 2024 and 2025.
External Liquidity Relatively Weak: The near absence of foreign-currency government debt supports the sustainability of Malaysia’s external finances. Exposure to foreign financing risk arises mainly from high short-term debt (over 25% of GDP), although a significant portion is stable intra-group borrowings. Non-resident holdings of domestic government bonds were around 22% at end-2023 and mostly stable, reflecting the deep, well-developed domestic bond market. Liquid external assets made up about 90% of liquid external liabilities as of end-2023 by Fitch’s estimates, below the ‘BBB’ median of 128%.
ESG – Governance: Malaysia has an ESG Relevance Score of ‘5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model.
Malaysia has a medium World Bank Governance Indicator ranking at 63.6, reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption, although there have been some high-level cases in recent years.
