KUALA LUMPUR (Dec 17): Fitch Ratings has affirmed Malaysia’s long-term foreign-currency issuer default rating (IDR) at BBB+ with a stable outlook, according to a statement on Monday.

“Malaysia’s ratings are 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. 

“These strengths are balanced against high public debt, a low revenue base relative to current expenditure, and weaker external liquidity relative to peers,” it said.

Fitch Rating expects Malaysia’s economy to expand by 5.2% in 2024, then slow to 4.5% in 2025, and 4.3% in 2026. 

The rating agency said steady labour market conditions and an income boost from pay hikes for civil servants in December 2024 and January 2026 should support household spending.

This, coupled with growth, further underpinned by investments from government-linked companies and foreign investment related to supply-chain diversification.

“However, while Malaysia’s export performance has benefitted from the global tech upcycle in 2024, we expect momentum to slow in 2025 due to weaker external demand. Growth prospects also face downside risks from an escalation in geopolitical tensions,” it added.

Fitch noted that Malaysia’s policy uncertainty has eased with a more stable ruling coalition formed in 2022, backed by a two-thirds parliamentary majority and an anti-hopping law preventing party switching. 

This administration, it noted, has passed the Public Finance and Fiscal Responsibility Act 2023 (PFFRA), and is working on strengthening state-owned enterprise governance and the National Anti-Corruption Strategy 2024-2028. 

“While improved policy certainty boosts investment, we believe coalition dynamics and diverse coalition partner interests still appear to constrain faster fiscal consolidation and tax reform,” it added.

The 2025 budget 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.

However, it said, this will be partly offset by lower petroleum-related revenue (18% of total revenue projected for 2025), given Fitch’s assumption that the Brent oil price will average US$70/bbl(barrel), against our estimate of US$80/bbl in 2024.

Meanwhile, Fitch also noted that the national oil company, Petroliam Nasional Bhd (Petronas) (BBB+/stable), is negotiating with state-owned Petroleum Sarawak Bhd over control of the natural gas distribution business in the state of Sarawak. 

“Final arrangements are pending and could affect Petronas’ profitability and capacity to contribute to federal government revenue, including paying dividend, which will add around 1.5% of GDP in 2025.”

Meanwhile, the government aims to extend subsidy rationalisation to RON95 petroleum, education and healthcare, following savings from cutting electricity subsidies and targeting diesel subsidies.

“This will reduce spending on subsidies, but a large share of the savings will be channelled to additional spending, including increased social assistance for lower-income groups,” it added.

The government is also undertaking a review on civil service remuneration, including pay hikes in December 2024 and January 2026.

“We forecast 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 PFFRA. We view this as a credible, gradual fiscal consolidation path.”