KUALA LUMPUR (Jan 24): Moody's Ratings on Friday affirmed Malaysia's sovereign rating at A3 with a stable outlook, citing strong medium-term growth prospects and effective policymaking institutions.

However, Malaysia’s fiscal metrics remain weak due to the relatively high debt and weak debt affordability amid narrow revenue base even as the government has made some progress consolidating its finances, the ratings agency flagged in a statement.

“The stable outlook reflects balanced risks,” Moody’s said.

Malaysia’s long-running fiscal deficits and ballooning government borrowings have been sore points for ratings agencies. On its part, the government has had some successes at trimming spending and raising tax collection to plug the gap in its budget.

Fitch affirmed its rating at BBB+ in December 2024 while S&P last had Malaysia on A- in June 2024. All three ratings are investment grades, meaning that the government has relatively low risks of defaulting on its debts.

Malaysia plans to shrink its fiscal deficit as a percentage of economic output to 3.8% this year from 4.3% in 2024, leading to a reduction in the debt burden to around 63% of gross domestic product.

Interest payments as a share of revenue, however, would remain above 15% in the next two to three years, according to Moody’s, slightly higher than in 2022 and 2023 when global commodity prices provided a temporary boost to revenue.

“A more rapid pace of fiscal consolidation has been hampered by the government's support for growth amid the onset of higher global inflation since 2022,” the ratings agency said, pointing to the rise in subsidies and social assistance and adjustment in civil servant salaries, as well as repayments of debts taken by the troubled 1Malaysia Development Bhd.

Moody’s highlighted recent efforts on subsidy rationalisation and a number of reforms — including levy on sales of low value goods and an expansion in sales-and-services tax — that have led to incremental increase in revenue.

Still, Malaysia is expected to be the fastest growing A-rated economy over the next two years and buck the muted growth of China, its biggest trading partner, according to Moody’s projections.

The country has been benefitting from foreign direct investments as years-long trade and investment diversification away from China pick up steam, the agency noted.

That has driven gross fixed capital formation, particularly in sectors such as semiconductor manufacturing and data centres that build upon its advantages in human capital, plentiful land and affordable energy as compared to its emerging market peers, Moody’s said.

“We view political stability since the formation of the current unity government since late 2022 as providing more space to pursue reform relative to the prior four-year period that was characterised by short-lived governments,” it said.