Moody's Affirms Malaysia's Sovereign Credit Rating At ‘A3’; Outlook Stable

The Government welcomes Moody's Investors Service (Moody's) affirmation of Malaysia's sovereign credit ratings at A3 with “Stable” outlook. The affirmation reflects the country's determination to sustain economic growth momentum and resilience amidst highly challenging global conditions and uncertainties.

Moody's explained, “Malaysia's economic diversification and competitiveness and the government's access to robust sources of domestic financing will persist as credit strengths, helping to mitigate fiscal risks that have risen following the COVID-19 pandemic, including an increased debt burden and weakened debt affordability”.

Moody's expects Malaysia's real GDP growth to ease to 4.5% in 2023, weighed down by weaker global economic conditions affecting external demand for manufactured products amid improving exports of commodities, recoveries in tourism and strengthening labour market conditions. In the medium term, Moody's forecasts Malaysia's real GDP growth at around 5% by 2025 nearing the potential growth output, citing favorable demographics relative to A-rated peers, strong levels of investment and higher demand from advanced economies.

Solid Growth Prospects

According to Moody's, Malaysia's economic performance and resilience is expected to improve, supported by diverse drivers of growth and Malaysia's participation in global value chains including a stronger influx of foreign investment in high-value industries. Moody's also indicated that medium-term growth will continue to be supported by the country's integration into regional and global supply chains and high economic competitiveness, which is expected to contribute to a sizeable external surplus. In addition, other factors influencing growth include Malaysia's advantage over regional emerging market peers in infrastructure quality, higher education and training, labour and product market efficiency, as well as technology adoption. Meanwhile, it states that Malaysia continues to demonstrate a high degree of economic complexity, reflecting knowledge intensity of key merchandise exports, such as electrical and electronic products (E&E).

Strong Institutions and Policy Effectiveness

Moody's also acknowledged the strength of Malaysian institutions in withstanding the various challenges through effective monetary and macroeconomic policy implementation and the resilience of the banking system through the tight supervision of the central bank. It noted that there was improved transparency in the reporting of contingent liabilities and the publication of the Medium-Term Fiscal Framework, indicating improving effectiveness of fiscal policy. In this regard, Moody's expects Malaysia's efforts through various governance reforms including the upcoming Fiscal Responsibility Act to enhance fiscal accountability while the Government Procurement Act will address wastages and corruption. In their view, these reforms provide clarity in the government's efforts towards fiscal consolidation and debt stabilisation.

Gradual Fiscal Consolidation

Meanwhile, Moody's expects fiscal deficit to reduce marginally to 5% of GDP in 2023, and a gradual fiscal consolidation trajectory in 2024 and 2025 in line with official projection of 3.6% by 2025, citing constrained revenue base and rigid expenditure commitments. Moody's anticipates government debt burden to reduce to 61% of GDP in 2024, and highlighted limited risk of crystalisation from contingent liabilities. As such, Moody's noted that the deep domestic capital market provided an offset to the weaker fiscal position while interest rates and the government yield curve have normalized to pre-pandemic levels and remained stable.

However, Moody's highlighted the need for reforms to broaden the revenue base which is amongst the narrowest in A-rated peers and the rigid expenditure commitments including pension sustainability, debt service charges and subsidies. In addition, the elevated debt level and contingent liability commitments pose risk to debt affordability metrics.

In this regard, and in line with the Malaysia MADANI vision, the Government remains committed to drive inclusive and sustainable growth, restore confidence in public institutions and governance as well as safeguard social justice for all Malaysians.

The Government will strive towards strengthening economic growth and promote increased investments while focusing on initiatives to control inflationary pressures and mitigate the rakyat's burden on cost of living. The Government is also committed to improve its fiscal position and debt level to ensure structural soundness and credible institutional framework in managing public finances.