Fitch Ratings anticipates a slowdown in Malaysia's debt capital market (DCM) activity in 2025, primarily due to reduced sovereign debt issuance. Despite this, the funding environment should remain stable, with the policy rate likely at 3% over the year. We also believe Malaysia will retain its position as the world's largest sukuk market, largely driven by the sovereign and supported by banks and corporates that seek to diversify funding through the DCM. However, risks persist, such as ringgit volatility, interest rate and commodity price fluctuations, and global geopolitical events.

"As Malaysia retains its status as the world's largest sukuk market, sustained by a robust domestic debt capital market, we anticipate continued innovation and diversification within this sector," said Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings. "Fitch believes the development of new financial products, a diverse range of issuers and investors alongside further regulatory reform will facilitate sustained capital market growth, despite the projected slowdown in issuance in 2025. A steadier ringgit could also attract more foreign investors."

Malaysia's DCM is well-developed compared with many other emerging markets and ASEAN. The DCM expanded by 9.9% over 2024, reaching USD557 billion outstanding, or about 129% of GDP. Around 60% of the issuance came from the sovereign, with the remainder coming from financial institutions and corporates. Despite this growth, DCM issuance declined by 24.8% over the year, reflecting the government's medium-term goal to reduce federal debt. Malaysia's DCM is the third largest in ASEAN, with 19% share, mostly ringgit-denominated (92%).

Malaysia has the largest global sukuk market, with a 36% market share at end-2024. Sukuk accounted for about 60% of Malaysia's DCM. Fitch rates 65% of US-dollar Malaysian sukuk outstanding within the 'BBB' category.