Fitch Ratings has affirmed Malaysia's long-term foreign-currency issuer default rating (IDR) at 'BBB+' with a Stable Outlook, reflecting the country's resilient economic growth prospects, persistent current account surpluses and diversified export base. These strengths are offset by high public debt levels, a relatively low revenue base and weaker external liquidity compared to peers.
In its latest review, Fitch said the Stable Outlook indicates expectations that Malaysia's government debt-to-GDP ratio will decline only gradually over the medium term, supported by sustained fiscal consolidation measures.
Resilient Medium-Term Growth
Fitch expects Malaysia's economy to grow 4.6% in 2025, moderating to 4.0% in 2026 and 4.2% in 2027. Strong labour conditions, rising wages and firm domestic demand are expected to underpin growth, while a 13.2% year-on-year rise in approved investments in the first nine months of 2025 signals a solid pipeline, particularly in AI-related capital expenditure.
Malaysia also benefitted from stronger-than-expected exports in 2025 on the back of a global tech upcycle and front-loading activities, though export momentum is anticipated to ease in 2026 as front-loading dissipates.
Trade Outlook Supported by US Deal, but Risks Persist
Fitch noted that Malaysia's recent trade agreement with the United States provides short-term clarity, preserving existing "reciprocal" tariffs at 19% for Malaysian exports and exempting up to 12% of exports from such tariffs. However, it warned of lingering downside risks, including weaker global demand and potential US tariffs on semiconductor products—Malaysia's largest export category to the US.
Improved Political Stability Aids Policy Execution
The ratings agency highlighted improving political stability under the unity government formed in 2022, which holds a two-thirds parliamentary majority. This stability has enhanced business confidence and supported structural reforms, including upcoming investment incentive frameworks and the Government Service Efficiency Commitment Act.
Key legislative improvements such as the Government Procurement Bill and the Public Finance and Fiscal Responsibility Act 2023 (PFFRA) are expected to bolster transparency and public financial management.
Fiscal Consolidation on Track, but Challenges Remain
Fitch estimates the federal government deficit will narrow to 3.8% of GDP in 2025, down from 5.5% in 2022, and ease further to 3.5% in 2026, in line with the government's fiscal targets. The PFFRA's 3% deficit objective by 2028 is seen as achievable, provided subsidy rationalisation and revenue broadening continue.
However, deeper tax reforms may face political resistance amid pressures to maintain social spending.
Revenue Pressure from Weaker Oil Proceeds
Federal revenue is projected to dip slightly to 16.3% of GDP in 2026, as improved SST collection and e-invoicing gains are offset by declining petroleum-related income. Malaysia aims to increase tax revenue from about 13% currently to 15% of GDP over the medium term.
Fitch also highlighted potential revenue risks from PETRONAS, which is negotiating with Petroleum Sarawak Bhd over natural gas distribution in Sarawak. Any adverse outcome could affect PETRONAS' profitability—and consequently, federal dividends that contribute about 1% of GDP.
Limited Subsidy Savings, High Debt Levels
Despite ongoing subsidy rationalisation, Fitch projects total expenditure will fall modestly to 19.8% of GDP in 2026, with savings offset by higher public sector salaries and pensions.
Malaysia's general government debt is expected to peak at about 77% of GDP in 2025, well above the 'BBB' median of 58%. While the ratio is projected to edge down to around 74% by 2029, federal debt is expected to remain above the PFFRA's 60% target for several years.
Interest payments are estimated at 13.5% of government revenue—significantly higher than the 'BBB' median of 9.2%.
External Position Stable, Though Liquidity Risks Remain
Malaysia's external finances are supported by long-standing current account surpluses and competitive manufacturing. Fitch expects surpluses of 1–2% of GDP over the medium term.
However, the country faces elevated external liquidity risks due to high short-term private external debt, exceeding 25% of GDP, although much of it consists of stable intra-group borrowings. Non-resident holdings represented 21% of government bonds in 3Q25, underscoring the depth of the domestic bond market.
Official reserves rose to USD124 billion as at end-October 2025, equivalent to 4.3 months of current payments—though still below peer medians when measured against liquid external liabilities.
Governance Indicators Support Rating
Malaysia maintains an ESG Relevance Score of '5[+]' for governance-related metrics, reflecting moderate institutional strength, adherence to the rule of law and a record of peaceful political transitions despite past high-profile corruption cases.
