MARC Ratings has affirmed its public information local currency sovereign rating of AAA/stable on Malaysia, based on its national sovereign rating scale. Under this rating scale, the sovereign state of Malaysia carries the lowest relative risk for reasons that include its authority to tax and set interest rates.

The rating reflects the country’s credit strengths including a competitive and well-diversified economy that has kept growth relatively resilient and stable. For 2022, we expect real GDP growth to rebound further to 5.7%. Meanwhile, Malaysia’s position in the 2021 edition of the Institute for Management Development (IMD) World Competitiveness Rankings improved to number 25 from number 27 previously. A reflection of its trade competitiveness, Malaysia’s current account balance remains in surplus. Consequently, it enjoys a healthy external position and adequate official foreign reserves. These, together with the central bank’s credible and prudent monetary policy, have helped keep spill overs from external financial market volatility minimal.

Key credit challenges include economic scarring from COVID-19, which has pushed macro-financial risks significantly higher. While the government seems committed to fiscal consolidation, its efforts appear to be losing momentum. We think consolidation plans could be put on hold in the near to medium term to avoid jeopardising economic recovery. The country has started treating COVID-19 as an endemic disease and we think policies to support steady growth should come first, rather than fiscal consolidation, especially given the economic damage. In any case, we think the country’s fiscal and debt metrics will not materially improve any time soon given the apparently weakening momentum of fiscal consolidation efforts.

The stable outlook reflects our expectation of ongoing policy continuity and continued stable economic management. It also reflects our expectation that Malaysia’s external position will remain healthy.

Going forward, credit positive developments would include a) sustained fiscal consolidation efforts – including revenue broadening measures – that can improve both fiscal and debt metrics; and b) a solidified reform agenda, which can lead to stronger institutions and governance. On the other hand, credit negative developments would include a) further deterioration of fiscal and debt metrics amid efforts to repair the economic damage; and b) further weakening of the government’s appetite for reform and consequently growth potential due to rising political noise.