Fiscal consolidation pays off for Malaysia

The Star

17-07-2025

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
KUALA LUMPUR: The country's fiscal consolidation efforts are beginning to bear fruit, with measures to narrow the fiscal deficit and reduce government debt gaining traction despite criticism, signalling a positive outlook for the country's sovereign credit ratings.
'Our foreign reserves have risen to US$119.9bil from US$115.5bil in the first half of 2025, while foreign ownership of Malaysian Government Securities (MGS) increased to 35.6% in May from 32% in January.
'This reflects a positive view of the government of Malaysia's creditworthiness,' Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid told Bernama.
Although the country's fiscal position is improving, with the fiscal deficit narrowing to 4.5% of gross domestic product (GDP) from 5.7% previously, he highlighted that for the rakyat, fiscal consolidation translates to larger allocations for government assistance programmes, including the Sumbangan Asas Rahmah (Sara) and Sumbangan Tunai Rahmah (STR).
As of the first half of 2025, Malaysia's fiscal deficit had improved to RM34bil compared to RM46bil in the same period last year.
'The government coffers are improving as fiscal consolidation progresses. The government allocated RM13bil for the STR and Sara programmes in 2025, the highest ever distributed for cash aid in Malaysia, compared to RM10bil last year,' he said.
He further stated that the number of cash aid recipients had increased to 5.4 million from the previous 700,000 beneficiaries, showing that the assistance is now being better targeted rather than disbursed through blanket subsidies.
Mohd Afzanizam noted that this could potentially lead to a more favourable credit review, with Malaysia's current sovereign credit ratings standing at A3 (Moody's), A- (S&P Global Ratings) and BBB+ (Fitch Ratings).
'The realignment of subsidies and continued fiscal consolidation will eventually yield positive outcomes and improve the government's financial position,' he said.
Transitioning to external factors, Mohd Afzanizam said the global environment also has a bearing on Malaysia's economic outlook, particularly developments in the United States.
He pointed out that the United States is no longer rated triple-A across the board, with current sovereign credit ratings at Aa1 (Moody's), AA+ (S&P Global Ratings) and AA+ (Fitch Ratings).
'This signals that the US government's ability to manage its debt is not as strong as before.
'All three major rating agencies now classify US debt around AA+ or Aa1, reflecting rising concerns over fiscal deficits, mounting debt levels and political gridlock,' he said.
Mohd Afzanizam elaborated that the erosion of credit strength reduces the appeal of US assets and accelerates global de-dollarisation trends.
'Geopolitical tensions are also contributing to this shift, as more countries look to diversify their trade partnerships and reduce reliance on the US dollar,' he added.
He also cautioned that recent US policy proposals could place further downward pressure on the greenback, citing the US Senate's proposal involving tax cuts totalling US$4.5 trillion, to be funded by reductions in social spending, including healthcare, aid programmes and clean energy subsidies.