KUALA LUMPUR: Malaysia's debt over gross domestic product (GDP) is expected to fall to 73.7 per cent in 2026, which could improve Malaysia's ratings, said Fitch Ratings.
It said the 2025 Budget projected a deficit of 3.8 per cent of GDP next year excluding new budget measures, down from an estimated 4.3 per cent in 2024.
These figures broadly match Fitch's assumptions when it affirmed Malaysia's rating at 'BBB+' with a stable outlook in June 2024.
It said the government's decision to channel a large share of savings from subsidy reform to additional spending, including increased social assistance for lower-income groups and higher wages for civil servants, will contribute to a relatively slow pace of debt reduction.
"We project that Malaysia's general government debt over GDP will fall from 76.7 per cent in 2023 to 73.7 per cent in 2026. This will remain significantly higher than the median for 'BBB' category sovereigns of 59.1 per cent in 2026, though an upward trend in the median debt level means that the gap between Malaysia and its peers narrows over 2024-2026.
"Positive fiscal surprises that lead to a faster reduction in debt over GDP than we expect could put upward pressure on Malaysia's rating," it said in a note.
The budget reiterated the Public Finance and Fiscal Responsibility Act's (FRA) target to reduce the deficit to 3.0 per cent of GDP and federal government debt to below 60 per cent of GDP in the medium term. However, the government did not specify when it would be reached.
Fitch added that the government debt stood at 63.1 per cent of GDP as of end-June 2024, and the medium-term fiscal framework projects deficits will average 3.5 per cent of GDP over 2025-2027.
"The government projects revenue collection in 2025 will be equivalent to around 16.3 per cent of GDP in 2025, from 16.5 per cent in 2024. This partly reflects a weaker contribution from petroleum-related revenues," it said.
Fitch's baseline projection for Brent oil prices in 2025, at US$70 a barrel (bbl), is below the bottom of the government's projected range of US$75-80/bbl, pointing to additional downside risks to revenue.
The 2025 Budget also unveiled some new revenue-raising measures, including a 2.0 per cent tax on individual dividend income, higher excise duties on sugary drinks, and adjustments to the sales and service tax to expand its scope and make it more progressive.
However, the net effect of these measures is expected to be relatively small.
"The government said it would enhance Sales and Services Tax collection instead of reintroducing the Goods and Sales Tax, unless the minimum wage reaches MR3,000-4,000 per month—a target that remains some way off. It was raised to RM1,700 a month in the budget, from MYR1,500," it added.
The firm's general government debt metrics include committed guarantees from the government, amounting to around 12 per cent of GDP.
"These committed guarantees represent 56.7 per cent of total outstanding financial guarantees under the FRA. At 20.9 per cent of GDP as of end-June 2024, these guarantees are below the permitted threshold of 25 per cent under the FRA," it added.