MARC Ratings has affirmed its public information sovereign rating on Malaysia at AAA with a stable outlook based on its national rating scale. The AAA rating reflects the country’s credit strengths, which include an open and increasingly diversified economy, steady economic growth, effective monetary policies and a resilient financial sector. In 2024, Malaysia’s gross domestic product (GDP) growth has been above trend, and is expected to remain so in 2025, amid strengthening foreign investments and robust consumer spending.

Malaysia’s consistent current account surpluses, adequate international reserves, small proportion of foreign currency–denominated debt and real effective exchange rate with low volatility reflect the quality of the country’s external financial position. As such, Malaysia’s effective monetary policies have limited the extent to which occasional financial market volatility affects the real economy. Malaysia’s financial sector has also demonstrated resilience, with gross impaired loans remaining low, at 1.6% of total loans in 1H2024 (2019-2023 average: 1.6%), while the total capital ratio of 18.5% is well above the Basel III minimum requirement of 10.5% (inclusive of a 2.5% capital conservation buffer).

Key credit challenges include Malaysia’s elevated fiscal deficit and debt levels, which are being closely managed by the government. While the country’s tax revenue-to-GDP ratio has recovered to the pre-pandemic level, at 12.6% in 2023, it is below the peer median of 18.9%. Additionally, public debt is projected to remain around 64.0% of GDP in 2024 (2023: 64.3%), higher than the peer median of 55%. Despite these fiscal pressures, Malaysia’s debt profile is expected to improve over the medium term, with the fiscal deficit projected to decline to 4.3% of GDP in 2024 and 3.8% of GDP in 2025 (2023: 5.0%; 2021’s peak: 6.4%).

The stable outlook reflects expectations that Malaysia’s economy will continue to sustain healthy GDP growth momentum, enhance fiscal efficiency, and address structural challenges, including high subsidies, the low tax revenue-to-GDP ratio and elevated government debt. The outlook hinges on continued political cohesion, with the success of fiscal and institutional reforms dependent on the evolving dynamics within the coalition government.

Looking ahead, key priorities for strengthening Malaysia’s credit profile include improving fiscal and debt metrics through sustained fiscal consolidation efforts and ensuring the timely delivery of planned economic targets. Conversely, failure to meet fiscal consolidation goals or economic targets as planned could weaken the credit profile.