THE country’s debt-to-gross domestic product (GDP) ratio is estimated to record about 63% in 2023 and dip to slightly below 60% in 2028, under a baseline scenario based on Malaysia’s debt sustainability analysis (DSA).
Likewise, the annual gross borrowing size reflects the fiscal consolidation trajectory with gross financing needs (GFN)-to-GDP ratio forecast to gradually reduce to 5.6% in 2028 compared with 12.3% in 2023.
Under the DSA framework, the threshold of debt burden for emerging markets is set at a level of 70% for debt-to-GDP ratio and 15% for GFN-to-GDP ratio.
A country’s debt sustainability is determined by the government’s ability to serve all its current and future payment obligations without requiring exceptional financial assistance or experiencing default.
The DSA illustrates that higher economic growth and fiscal surplus are the two main determinants which could quickly bring down the nation’s debt level.
The government has applied the DSA framework developed by the International Monetary Fund and the World Bank as a risk assessment tool since 2019.
The DSA assessment serves to guide the government’s fiscal conduct as well as borrowing and debt strategy, to enable the country to absorb any shocks in the medium- and long-term, and avoid payment difficulties.
As such, conducting sensitivity analyses or stress tests enable governments to evaluate potential impacts of various macro-fiscal shocks on the level of indebtedness.
Consequently, appropriate policy measures can be tailored and implemented ahead in order to mitigate the effects if such circumstances arise.
In addition to the macro-fiscal and contingent liabilities stress tests, the DSA also provides a comprehensive risk assessment in evaluating the current debt profile of a country.
Under this assessment, the external debt financing requirement is categorised as high risk since it surpasses the upper early warning threshold which increases the government exposure to foreign exchange risk.
In terms of debt profile vulnerabilities, the share of short-term debt has significantly improved in 2023 as compared to 2021 and no longer poses a high risk to the country.
This is due to the high repayment of treasury bills which leads to a reduction in the outstanding of short-term financing instruments.
Even though the external debt financing requirement remains at high risk, the possibility of defaulting in the offshore borrowing is unlikely.
This is due to the sizable asset availability and good creditworthiness among external debt issuers.
Furthermore, prudential requirements on liquidity and funding risk management imposed by the regulator also support to alleviate the risk.
Overall, the identified risks are manageable given the implementation of fiscal measures but continuous effort should be taken in order to rebuild wider fiscal buffers, thus ensuring all shocks are within the low-risk parameters.
