April 25, 2025
PETALING JAYA – Malaysia may not achieve a lower fiscal deficit target of 3.8% of gross domestic product (GDP) this year versus 4.1% in 2024, warn analysts, as the economy faces risks of slower growth this year.
As of December 2024, Malaysia’s debt-to-GDP ratio stood at 64.6%, amounting to RM1.25 trillion, according to the Finance Ministry’s quarterly report for the fourth quarter of 2024.
iFAST Capital research analyst Kevin Khaw Khai Sheng said slower economic growth resulting from US tariffs is the main concern that could derail the government’s ability to achieve its target.
“This year may not be the ideal year to achieve the 3.8% target due to looming uncertainties. We may probably need to wait until next year to reach it,” he told StarBiz.
On Wednesday, the International Monetary Fund (IMF) in its latest Fiscal Monitor report warned that global public debt could climb above Covid-19 pandemic-era levels, hitting nearly 100% of global GDP by decade’s end.
The IMF said this is due to economic pressures from steep new US tariffs which may lead to slower growth and trade, potentially putting a strain on government budgets.
For 2025, the IMF expects global public debt to rise by 2.8 percentage points to 95.1% of global GDP.
However, Khaw said the country’s debt levels are not likely to rise to alarming levels, given Malaysia’s ability to maintain fiscal stability without relying too much on external debt.
“For instance, the country can still continue to collect dividends from Petroliam Nasional Bhd (PETRONAS). Our tax revenue is still healthy.
“Therefore, I do not expect there to be any significant negative impact on our debt levels.
“While the expected slowdown in growth may slightly delay progress, we will eventually meet the target,” he said.
Sunway University economics professor Yeah Kim Leng concurred that the government’s ability to achieve the fiscal deficit target may be “slightly” derailed given the lower revenue collection and possibly higher-than-budgeted government stimulus spending.
In contrast, economist Geoffrey Williams, however, said the government’s deficit target is still achievable even though slower growth puts pressure on fiscal consolidation and debt reduction.
Earlier this week, the IMF downgraded its real GDP growth forecast for Malaysia to 4.1% for 2025 from its January estimate of 4.7%.
“The economic growth downgrade is a consequence of the US tariffs and assumes reciprocal tariffs will be introduced in full. It would be equivalent to RM11.6bil for 2025.
“This is the economic cost if Malaysia fails to get a positive negotiated deal with the United States.
“This is why it is imperative to negotiate a good deal during the current 90-day pause,” Williams said.
He is referring to the broad 90-day pause instituted by US President Donald Trump, except for China, on the implementation of tariffs announced on April 2 to allow for negotiations to take place with other countries.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid opined that IMF’s warning on Wednesday is a cautionary note that global public debt levels would rise due to possible pump priming measures by fiscal authorities.
“I suppose it is a fair comment considering the degree of uncertainties brought by the Trump administration, especially in areas relating to import tariffs,” he said.
Meanwhile, UCSI University Malaysia finance associate professor and CME research fellow Liew Chee Yoong said the risks outlined by the IMF are “real and significant”.
But Malaysia still has time and policy options available to respond effectively.
While Malaysia’s debt exposure is currently manageable, Liew said sovereign debt vulnerability assessments by the Asian Development Bank indicated that it is highly sensitive to external shocks such as oil price volatility and capital outflows.
“Malaysia currently retains its investment-grade credit ratings from agencies such as S&P Global Ratings and Fitch Ratings, but they have also cautioned about Malaysia’s rising public debt levels and off-budget liabilities,” Liew said.
Even so, he noted that an immediate credit rating downgrade for Malaysia is unlikely, as long as Malaysia maintains its current fiscal discipline and economic fundamentals remain intact.
“In terms of policy options, Malaysia has a range of tools at its disposal to address rising debt levels and strengthen fiscal sustainability. A primary area of reform lies in the country’s taxation system,” Liew said.
Specifically, the reintroduction of the goods and services tax (GST) could help Malaysia broaden its revenue base significantly.
Coupled with improved tax compliance and reductions in tax evasion, these measures could enhance government revenue without drastically raising tax rates, he said.
Liew’s other recommendations include rationalisation of public spending, particularly subsidies, improving debt transparency and management, accelerating economic transformation through investments in specific areas, and export diversification.
Further, economists pointed out that there will be an increased need for counter-cyclical fiscal and monetary policies to shore up demand and mitigate a slowing economy caused by Trump’s tariffs and ongoing trade wars.
This means that cutting public spending such as on infrastructure projects could be counterproductive.
OCBC Senior Asean Economist Lavanya Venkateswaran said while reducing capital or infrastructure spending will help balance the fiscal position in the short-term, this will produce less than ideal outcomes over the medium-term.
“More fundamentally, bolstering reforms through national economic plans for the industry and semiconductor sector and diversifying trade and investment partners will help keep the economy in good stead over the medium-term,” she said.
Meanwhile, Yeah said a temporary fiscal loosening will be less damaging to the economy as long as the medium term debt trajectory is on a downward trend and government spending increase is shown to be productive, temporary and targeted.
“These justifications for anti-cyclical government spending however do detract from the need for the government to reduce spending that are not critical or postponing large public projects that can be delayed without jeopardising overall economic efficiency.
“These actions should kick in to avert deficit and debt surges that shake confidence and alarm investors and rating agencies,” he said.