MARC Ratings has affirmed its public information sovereign rating of AAA/Stable on Malaysia based on its national rating scale. The AAA rating reflects the country’s credit strengths, including a competitive and diversified economy that has maintained a relatively steady growth trajectory.

Malaysia has consistently posted a current account (CA) surplus, which contributes to a stable external financial position. However, we note that Malaysia’s CA surplus has declined to 3.1% of gross domestic product (GDP) in 2022 (five-year average: 3.4%) compared to 10.9% in 2011, a shared trend among developing Asian economies due to a compositional shift from export-led to domestic-led growth. Furthermore, Malaysia’s prudent monetary policy and a deep capital market have effectively limited the extent to which occasional financial market volatility affects the real economy.

Key credit challenges include potential volatility in the growth trajectory over the medium term, following the economy’s nascent recovery from the repercussions of the pandemic. Another major challenge arises from Malaysia’s elevated fiscal and debt levels. The fiscal deficit deepened to 6.4% in 2021 amid the pandemic, prompting the government to focus on fiscal consolidation, with a target of a 5.0% fiscal deficit-to-GDP ratio in 2023 (2022: -5.6%). In the medium term, the government hopes to achieve a deficit-to-GDP ratio of 3.5%.

Furthermore, in view of the continued need to finance the nation’s development and socioeconomic agendas, the debt level is likely to remain elevated. While within the statutory limits, the government’s debt level stood elevated at 60.3% of GDP in 2022 (2021: 63.3%) and the Ministry of Finance expects this ratio to reach 62% of GDP in 2023. Additionally, maintaining political stability following the state elections held in August 2023 is essential to facilitate the government’s plans to pursue major fiscal and institutional reforms.

The stable outlook reflects our expectation that continuity of economic policies will maintain GDP growth momentum, while helping to address fiscal efficiency, the high level of subsidies and government debt levels. In addition, it reflects our expectation that Malaysia’s external position will remain stable, supported by a persistent CA surplus and ongoing measures to enhance foreign reserves accumulation by raising potential exports.

Going forward, Malaysia’s credit profile would strengthen if: a) fiscal and debt metrics improve following sustained fiscal consolidation efforts, including revenue broadening measures and expenditure rationalisation; b) political cohesiveness improves; and c) planned economic targets are delivered in a timely manner. Conversely, the credit profile can deteriorate if fiscal consolidation efforts and economic plans are not delivered within expectations.