KUALA LUMPUR (Oct 15): The government’s ability to manage its debt and borrowing costs will be closely watched by investors and international credit rating agencies as measures of Malaysia’s fiscal health, said Maybank Investment Banking Group chief economist Suhaimi Ilias.

The debt-to-gross domestic product (GDP) ratio and debt service charges (DSC) — both of which are currently close to their policy ceilings — are primary metrics for measuring how effectively Putrajaya is meeting its commitments under the Fiscal Responsibility Act (FRA), he said.

"The debt-to-GDP ratio is one metric to keep an eye on because it seems to be quite sticky at this point of time, despite successive years of reduction in budget deficit-to-GDP ratio,” Suhaimi said at Maybank's Economic Outlook 2026 conference. “One more metric is the DSC-to-revenue ratio.”

Malaysia appears broadly on track to meet the FRA’s fiscal deficit target of 3% of GDP, Suhaimi said, noting the country is also satisfying other conditions, such as maintaining development expenditure above 3% of GDP and keeping government-guaranteed debt below 25% of GDP.

But the debt-to-GDP ratio has persistently hovered close to the 65% ceiling, he flagged.

“If you look at Malaysian Government Securities, Government Investment Issues and Islamic Treasury Bills, the ceiling is 65%,” he explained. “Over the past five years, and even as projected by the Ministry of Finance (MOF), it will continue to be very close to that ceiling.”

As of end June 2025, Malaysia’s federal government debt totaled RM1.304 trillion, equivalent to 64.7% of GDP — a slight increase from 64.6% at the end of 2024. The FRA’s medium-term goal is to bring this ratio down to 60%.

At the same time, the government’s debt service charges — the second-largest item in its operating budget after emoluments — are projected to rise by 7.4% to RM58.3 billion in 2026, which would account for 17% of revenue. This compares to RM54.3 billion, or 16.3% of revenue, in 2025. The FRA sets a 15% limit for this particular ratio.

Nevertheless, the annual growth rate of the DSC has been slowing, decreasing from 12.3% in 2023 and 9% in 2024 to 7.6% in 2025.

Suhaimi also commented on the government’s RM5.9 billion allocation for research, development, commercialisation, and innovation (R&D) under Budget 2026, calling it a vital move for Malaysia to sustain growth beyond its traditional, cost-based economic model.

“I think the time has come for us to take R&D seriously because everything now is about competitiveness, efficiency and productivity,” he asserted. “Our economic model that relied on all things cheap — from undervalued currency, subsidies and reliance on foreign workers — got us to where we are now, but won’t get us to where we want to be.”

He stressed the importance of closely monitoring R&D outcomes and fostering stronger collaboration between academic institutions and industry, to ensure the allocation yields tangible results.

“I just hope that certain measures regarding R&D would be clearly monitored and tracked to make sure the nearly RM6 billion allocation generates something,” he said. “There needs to be that push for businesses and industries to collaborate with institutions of higher learning to come up with innovations that can be commercialised.”

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