Universiti Malaya (UM) senior economics lecturer Goh Lim Thye said the national debt, which stood at RM1.22 trillion and 63% of gross domestic product (GDP) as of April 2024, warrants careful management but “is not inherently a threat to future prosperity”.
“In assessing debt sustainability, economists focus less on the absolute size of the debt and more on the country’s ability to service it over time without compromising growth or triggering financial instability,” he told FMT.
In Malaysia’s case, he said, the country still enjoys substantial fiscal capacity, a diversified economic base, and continued access to domestic and international capital markets.
More importantly, international institutions continue to signal confidence in Malaysia’s fundamentals, he said.
“All three major credit rating agencies — Standard & Poor’s, Moody’s and Fitch Ratings — have reaffirmed Malaysia’s investment-grade ratings in 2024,” said Goh, who is deputy dean (development) at UM’s faculty of business and economics.
“These ratings send an important message to the global investment community: Malaysia’s fiscal position is being managed prudently, and the government is making steady progress on necessary reforms,” he added.
Praise from the IMF
The government’s fiscal reform initiatives have also been given a positive assessment by the International Monetary Fund (IMF).
In its March report following consultations with Malaysian authorities last December, the IMF welcomed the government’s commitment to fiscal consolidation and the “historic enactment” of the Public Finance and Fiscal Responsibility Act (FRA).
“Current policies are focused on rebuilding fiscal buffers, augmenting growth potential, and strengthening social protection while preserving macroeconomic and financial stability.
“The landmark FRA, enacted in 2023, aims to strengthen fiscal management and governance,” it said.
The IMF said Malaysia’s favorable economic conditions provide a window of opportunity to build macroeconomic policy buffers and accelerate structural reforms.
The agency noted that under the Madani Economy, the government has developed a set of policy frameworks that focus on increasing incomes, addressing climate change, promoting digitalisation, and enhancing governance.
Fiscal and structural reforms
MIDF Amanah Investment Bank head of research Imran Yusof agrees that the government’s on-going fiscal and structural reforms will provide a good buffer and improve on the debt position.
“We believe (the government) is on the right track to ensure that we can get a higher surplus and lower the fiscal deficit,” he said.
The administration’s fiscal consolidation efforts are already bearing fruit, with the fiscal deficit on a steady decline since the unity government took power in late 2022.
It outperformed its fiscal deficit target of 4.3% in 2024, achieving a reduction to 4.1% of GDP from 5% in 2023. It is projecting a further drop in the deficit to 3.8% in 2025.
A fiscal deficit occurs when a government’s total expenditure exceeds its income, excluding borrowings.
The declining fiscal deficit is on the back of a steady reduction in new government borrowings, dropping to RM75 billion in 2024 from RM93 billion in 2023. In 2022, the previous administration borrowed RM100 billion.
On the national debt, Imran opined it is more contextual to look at it from a debt-to-GDP ratio perspective rather than the absolute amount.
He noted that as long as there is a budget deficit then the national debt level will continue to grow.
“However, Malaysia has always practised a balanced operating budget, and the deficit is caused by development expenditure, which is akin to investment for the country’s economic growth.”
He explained the development expenditure, which is sourced through borrowings, is to ensure the economy continues growing or that economic shocks are not too detrimental to the rakyat’s livelihood.
“Therefore, as long as nominal GDP continues to grow, then we expect the debt levels to be manageable,” he said.
Inherited legacy problem
Goh said the elevated national debt is not a reflection of any mismanagement on the part of the current administration, but rather “a complex inheritance of crisis-related and structural factors”.
“The current debt burden is largely the result of legacy factors and extraordinary crisis-related spending,” he explained.
This includes the then government’s Covid-19 pandemic response, unfavourable pre-pandemic fiscal trends, and legacy financial mismanagement such as the 1MDB debacle.
The Covid-19 pandemic response ramped up the national debt as the Perikatan Nasional-led government deployed over RM530 billion in stimulus and recovery packages, of which over RM100 billion came in direct fiscal injections, from 2020 to 2022.
“These measures were critical to preserve livelihoods, safeguard SMEs, and prevent economic collapse, but came at a huge cost to public finances,” he said.
Goh also said the 1MDB scandal added long-term debt obligations and contingent liabilities on the government.
“While direct liabilities have been partly resolved, the broader fiscal implications — including lower investor trust and opportunity costs – persist today.
“The question now is how to restore resilience, and early signs suggest the government is taking meaningful steps in that direction,” he added.