KUALA LUMPUR (July 24): Malaysia’s government debt could top its self-imposed ceiling this year amid a moderating economy and sustained spending, Kenanga Investment Bank flagged on Thursday.
Federal government debt, including statutory debt, is projected to reach RM1.33 trillion, or 65.9% of this year’s economic output, according to Kenanga’s estimates. That’s a tad above the Ministry of Finance's 2025 forecast of 64%.
The breach is mainly due to slower economic growth in the second half of 2025 dragging down the nominal gross domestic product (GDP), which, in turn, raises the debt-to-GDP ratio, the research said in a note following Wednesday’s special announcement.
“The higher debt level also reflects rising financing needs tied to ongoing fiscal support measures and development spending,” Kenanga said.
On Wednesday, Prime Minister Datuk Seri Anwar Ibrahim announced a one-off cash handout, lower RON95 petrol prices and a freeze to scheduled highway toll increases, among other measures that the government hopes will help ease cost-of-living challenges.
Malaysia has been trying to shrink its annual budget deficit that stretches back to the Asian Financial Crisis. The shortfall drives debt higher as the government borrows to finance the spending that exceeds revenue.
Limit breach temporary
“A temporary breach of the 65.0% ceiling is possible, but we expect the government to manage this through a mix of fiscal discipline, revenue mobilisation, and prudent debt issuance,” Kenanga said.
Under its fiscal laws, the government has to keep its total outstanding statutory debt under 65% of the total value of goods and services produced in the country, a limit that has been raised from 60% before the pandemic to provide space for stimulus measures. Statutory debt comprises Malaysian Government Securities and its Islamic counterpart Government Investment Issues as well as shorter-term Malaysian Islamic Treasury Bills.
The latest measures are a “redistribution of recent macro gains” from a stronger ringgit and stable inflation to support domestic demand and ease cost-of-living pressures, Kenanga noted. “While politically popular, they heighten the tension between near-term social spending and medium-term fiscal discipline.”
This year, the government is targeting to shrink the budget gap to 3.8% of GDP through a combination of revenue-boosting measures and spending cuts. Rating agencies have cautioned that failure to meet its fiscal consolidation targets could hurt Malaysia’s investment-grade sovereign credit ratings, potentially driving up borrowing costs not only for the government but also for businesses and consumers alike.
“Continued investor confidence, supported by a stable domestic bond market and a stronger ringgit outlook, will be crucial in managing debt sustainability over the medium term,” Kenanga added.