In a statement today, the finance ministry said the government welcomed Fitch’s affirmation of the country’s sovereign credit rating at BBB+.
“The affirmation reflects the government’s commitment to fiscal reform and the country’s ability to maintain economic growth momentum as well as withstand weak and volatile global conditions,” the statement said.
According to Fitch, Malaysia’s ratings balance a “diversified economy with strong medium-term growth prospects” against high public debt, a low revenue base relative to the operating expenditures, and political considerations that may hinder long-term policymaking and reform implementation.
The ministry said the key rating drivers for Fitch to affirm Malaysia’s ratings include its gross domestic product (GDP) growth, strong current account position, anticipated reduction in the federal government deficit, and improved political stability.
“Fitch expects Malaysia’s real GDP growth to moderate to 4% in 2023 and 4.2% in 2024, amid improving political stability in the country.
“It also anticipates weak global demand and trade restrictions to undermine the country’s exports. However, this is expected to be cushioned by resilient domestic demand, supported by growth in wages and investment activities,” the statement said.
“Moving forward, the government is confident that the initiatives outlined in the Madani economic framework and the rolling out of the measures under the various national plans, namely the National Energy Transition Roadmap, New Industrial Master Plan 2030, and the Mid-Term Review of the 12th Malaysia Plan will galvanise growth further,” the ministry added.
Current account surpluses
In its report, Fitch commended the country’s current account position, which continues to record surpluses for more than two decades and expects the current account to remain in surplus in the medium term, notwithstanding external challenges.
It forecasts the current account to slightly narrow to 2.6% in 2023 (2022: 3%). However, it pointed out that Malaysia is well-positioned to benefit from the global supply chain diversification due to its competitive manufacturing sector and significant foreign direct investment (FDI) inflows since the reopening of the economy in 2022.
Fitch also predicts that the federal government deficit will decline to 3.5% in 2025 amid subsidy rationalisation and the roll-out of the global minimum tax.
In its statement, the finance ministry said the government is committed to pursue fiscal consolidation and “rebuild fiscal buffer for long-term sustainability”.
“In the medium term, the government is committed to reduce fiscal deficit from 5.6% in 2022 to 5% of GDP in 2023 as estimated, and subsequently to 4.3% in 2024,” it added.
Improved political stability
Fitch said the formation of the unity government with a two-thirds majority in Parliament has led to greater stability over the past year, helped by an anti-hopping law that prevents MPs from switching parties.
However, it noted the coalition partners’ interests vary and the anti-hopping law allows parties and blocs to collectively change their allegiance.
“We expect political considerations to continue to weigh on the prospects of any controversial reforms, particularly related to public finances,” it added.
On the issue of foreign debt, the ratings agency said Malaysia’s low share of foreign-currency debt, at about 2% of total government debt, supports its external finances.
It said Malaysia’s exposure to foreign financing risk mainly arises from high short-term debt (more than 25% of GDP), although a significant portion is stable intra-group borrowings.
“Non-resident holdings of domestic government bonds remain high at 22% of total as of Q3 2023 but are mostly stable, partly reflecting the deep and well-developed domestic bond market,” Fitch added.