It projected federal government debt, including statutory debt, to reach RM1.33 trillion or 65.9% of Malaysia’s 2025 gross domestic product (GDP), higher than the finance ministry’s forecast of 64%.
“A temporary breach of the 65% ceiling is possible, but we expect the government to manage this through a mix of fiscal discipline, revenue mobilisation, and prudent debt issuance,” said Kenanga in a note.
Under current fiscal laws, the government has to keep its total outstanding statutory debt under 65% of GDP.
The statutory debt limit was raised twice in recent years, from 55% to 60% at the onset of the Covid-19 pandemic in 2020, and then to 65% in 2021 to facilitate the government’s pandemic stimulus measures.
Kenanga said the potential breach of the debt ceiling is mainly due to “slower economic growth” in the second half, dragging down nominal GDP, which raises the debt-to-GDP ratio.
“The higher debt level also reflects rising financing needs tied to ongoing fiscal support measures and development spending,” it added.
In its report yesterday, the Asian Development Bank (ADB) said higher US tariffs and trade uncertainty have worsened the economic outlook for developing Asia and the Pacific.
Southeast Asia is expected to slow the most, with growth projected at 4.2% in 2025 and 4.3% in 2026, down from earlier forecasts of 4.7% for both years, the bank said.
Prime Minister Anwar Ibrahim announced yesterday a one-off cash handout of RM100 for all adult Malaysians, lower RON95 petrol prices, and a freeze on highway toll hikes to ease the cost-of-living crisis.
Kenanga described the latest measures as a “redistribution of recent macro gains” from a stronger ringgit and stable inflation to support domestic demand and ease cost-of-living pressures.
“While politically popular, they heighten the tension between near-term social spending and medium-term fiscal discipline.
“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.
Handouts not a problem
Meanwhile, international credit rating agencies say the planned cash handouts amounting to RM2 billion will unlikely exacerbate the government’s debt position.
The additional outlay is unlikely to materially affect Malaysia’s fiscal position, said S&P Global Ratings director Andrew Wood, who estimated the expenditure would equal about 0.1% of Malaysia’s economic output.
Fitch Ratings associate director Kathleen Chen said the additional spending can be accommodated within Malaysia’s 2025 budget.
However, she cautioned that further delays on fuel subsidy rationalisation could undermine fiscal consolidation efforts and jeopardise the government’s goal to reduce the fiscal deficit to 3% of GDP by 2028.
Missing fiscal targets could potentially hurt Malaysia’s investment-grade sovereign credit ratings, driving up borrowing costs not only for the government, but also businesses and consumers.