KUALA LUMPUR (Dec 8): Fitch Ratings has affirmed Malaysia's long-term foreign-currency issuer default rating or sovereign credit rating at 'BBB+' with a stable outlook, underpinned by the country's strong medium-term growth prospects, a diversified export base, and persistent current account surplus.

These strengths are, however, balanced by the country's high public debt, a lower revenue base, and weaker external liquidity when compared to its peers, it noted in a statement issued on Monday night.

"The stable outlook reflects our expectation that the government debt-to-GDP ratio will decline only gradually over the medium term, underpinned by the government's commitment to fiscal consolidation," Fitch said.

The ratings agency forecasts Malaysia’s full year GDP to expand by 4.6% in 2025, easing to 4% in 2026, before rebounding slightly to 4.2% in 2027. It sees the firm labour market conditions and rising wages supporting household spending, with momentum likely to carry into 2026.

The 13.2% year-on-year increase in approved investment projects for the first three quarters of the year point towards a strong pipeline in 2026, it said. The upside surprise on exports in 2025 on the global tech upcycle and front-loading effect is however likely to soften in 2026 as the front-loading effect dates, noted Fitch.

Despite the near-term relief from trade policy uncertainty following Malaysia's trade deal with the US, Fitch warns that the downside risks remain, including weaker external demand and possible US tariffs on semiconductors, comprising almost 30% of exports to the US and are currently exempted.

The reciprocal tariff rate on Malaysia exports to the US amounts to 19%.

Fitch also said that stronger policy certainty under the current ruling coalition that was formed in 2022 and backed by two-thirds parliamentary majority has lifted business sentiment.

“The government continues growth and accountability enhancing reforms, including an investment incentive framework to be introduced in 2026 and the Government Service Efficiency Commitment Act to improve regulatory quality,” said the rating agency, who also added that the Government Procurement Bill and Public Finance and Fiscal Responsibility Act 2023 (PFFRA) should also strengthen public financial management.

In terms of fiscal consolidation, which the rating agency sees taking place gradually, it opined that the PFFRA’s 3% of GDP deficit target as achievable by 2028 if subsidy rationalisation and modest revenue base broadening are sustained.

“Faster consolidation, potentially from deeper tax reform, remains politically challenging as the government balances diverging interests in the ruling coalition and social spending pressure,” said Fitch.

The agency forecasts the federal government deficit to land at 3.8% in 2025, down from 5.5% in 2022, on the back of stronger sales and services tax (SST) collection and subsidy reform. This, it said, is expected to narrow further in 2026 to 3.5% — in line with the budget.  

Meanwhile, Fitch is expecting to see federal government revenue easing to 16.3% of GDP in 2026 from its estimate of 16.5% in 2025, with gains from an expanded SST and e-invoicing more than offset by weaker petroleum-related revenue. It is said that there could be potentially lower dividends from national oil company Petroliam Nasional Bhd (PETRONAS), pending the negotiation with Petroleum Sarawak Bhd over control of the natural gas distribution business in the state.

The ratings agency also projected total expenditure to  fall to 19.8% of GDP in 2026, from 20.3% in 2025, driven by current expenditure savings and a reduction in capital outlays of 0.2% of GDP. It said that while the government expects a net subsidy and social assistance savings of 0.4% of GDP in 2026, it will be offset by higher salary and pension spending.

Fitch went on to say that it sees general government debt/GDP to peak at 77% in 2025, reflecting substantial deficits and subdued GDP deflators, before gradually falling to about 74% in 2029.

“Our figures include committed guarantees of about 11.8% of GDP at end-June 2025. Federal government debt (63.5% of GDP at end-June 2025) is likely to remain above the PFFRA's 60% of GDP target in the medium term, and we estimate interest payments at 13.5% of general government revenue in 2025, versus a 'BBB' median of 9.2%,” it said.

Furthermore, the ratings agency is forecasting a 1% to 2% of GDP current account surplus in the medium term supported by a diversified export base and competitive manufacturing sector. However, it mentioned that potential semiconductor specific tariff could pose a risk to the current account surplus position.

Malaysia’s external finances are supported by a low share of foreign-currency debt, amounting to 2% of total government debt, said Fitch. It said external liquidity risk arises from high short-term private external debt, at over 25% of GDP, but added that a large share comprises stable intra-group borrowings.

“Non-resident holdings accounted for about 21% of domestic government bonds in 3Q25, reflecting a deep local bond market,” said Fitch.

The agency said factors that could individually or collectively lead to negative rating action or a downgrade include an increase in government debt ratio over the medium term or a deterioration in medium-term growth prospects.

Meanwhile, what could lead to a positive rating action or an upgrade include a downward trend in general government debt/GDP that is closer to peer median or an improvement in governance standards relative to the "A" category, where for instance, through greater transparency and control of corruption.