KUALA LUMPUR: Fitch Ratings has affirmed Malaysia's long-term foreign-currency issuer default rating (IDR) at 'BBB+' with a stable outlook.
The credit rating agency said Malaysia's ratings were supported by strong and broad-based medium-term growth, driven by robust domestic and foreign investments and persistent current account surpluses with a diversified export base.
It added that these strengths are balanced against high public debt, a low revenue base relative to current expenditure, and weaker external liquidity relative to peers.
“We expect Malaysia's economy to expand by 5.2% in 2024, then slow to 4.5% in 2025 and 4.3% in 2026. Steady labour market conditions and an income boost from pay hikes for civil servants in December 2024 and January 2026 should support household spending, with growth further underpinned by investments from government-linked companies and foreign investment related to supply-chain diversification,” it said in a statement,
However, the rating agency stated that while Malaysia's export performance has benefited from the global tech upcycle in 2024, it expects momentum to slow in 2025 due to weaker external demand. Growth prospects also face downside risks from an escalation in geopolitical tensions.
Fitch Ratings noted that the Budget 2025 projects the federal government deficit to narrow to 3.8% of gross domestic product (GDP), from its estimated 4.3% in 2024.
“We expect 2025 federal government revenue/GDP to remain steady from our 2024 estimate of 16.5%. New budget measures, including a tax on individual dividend income and enhanced sales and service tax, will bring limited additional revenue, and will be partly offset by lower petroleum-related revenue (18% of total revenue projected for 2025), given Fitch Ratings’ assumption that Brent oil price will average US$70 per barrel), against our estimate of US$80 a barrel in 2024,” it added.
Additionally, Fitch Ratings forecasts the federal government deficit to decline to 3.5% of GDP in 2026, driven by continued subsidy rationalisation and modest tax increases.
“The government aims to reduce the deficit to below 3% in the medium term, as outlined by the Public Finance and Fiscal Responsibility Act 2023 (PFFRA). We view this as a credible, gradual fiscal consolidation path,” it added.
The agency projects general government debt/GDP will decrease to 75% by 2026, from 77% in 2023, but this will still be above its median 'BBB' category sovereign forecast of 59%.
“Our debt figures include committed guarantees, which were about 12% of GDP at end-June 2024 and represent 56.7% of total outstanding financial guarantees (according to the definition under the PFFRA).
“The government aims to reduce federal government debt, which stood at around 63% of GDP at end-June 2024, to below 60% of GDP under the PFFRA in the medium term,” it said.
Fitch Ratings expects inflation is reach 2.5% in 2025, from 2.0% in 2024. The impact of diesel subsidy rationalisation has been muted in 2024, due to its small consumer price index (CPI) weight and targeted approach.
“The government's handling of petroleum subsidies in 2H25 will likely mirror the approach, despite our expectation of stronger pass-through from the petroleum subsidy adjustments. Upside risks to inflation include the uncertain subsidy rationalisation, potential wage-inflation spirals from wage hikes and global market volatility. The policy rate is likely to stay at 3.0% throughout 2025,” it added.
Meanwhile, it expects Malaysia’s current account to remain in surplus in the medium term, and register a small surplus of 1.4% of GDP in 2024, due to large import bills for intermediate goods and capital
investments.
Malaysia's diversified exports and competitive manufacturing sector position it well to benefit from shifts in global supply chains. Approved foreign investments rose by 18% year-on-year in 1H24, indicating increased foreign investment to realise for 2025.
“External finances are supported by a low share of foreign currency debt, at about 2% of total government debt. Exposure to foreign financing risk mainly arises from high short-term debt, at more than 25% of GDP, although a large portion is in stable intra-group
borrowings.
“Non-resident holdings of domestic government bonds are high, at 22.6% in 3Q24, but stable, reflecting a deep domestic bond market. Liquid external assets were around 88% of liquid external liabilities, below the 2023 'BBB' median of 128%,” Fitch Ratings said.
